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Analysis: Equity market: Scarcity of growth
Our on-the-ground channel checks suggest severe economic growth deceleration with various sectors experiencing declines of between 30 percent and 90 percent year-on-year (yoy)
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Our on-the-ground channel checks suggest severe economic growth deceleration with various sectors experiencing declines of between 30 percent and 90 percent year-on-year (yoy). From brick sellers (middle-low) to diamond shops (high), the adverse impact of the current economic slowdown appears to be quite widespread.
We believe this downturn is caused by three main factors: First, low commodity prices translating to lower farmer incomes; second, a weak rupiah reflecting lower imports and delayed capital expenditures; and third, the government's aggressive taxation drive resulting in a slowing economy, putting off investors.
Some results in the first quarter (Q1) of this year (see table 2), released last week, back our anecdotal evidence as a couple of companies such as Astra Agro Lestari Tbk (AALI) and Logindo Samudramakmur (LEAD) booked 80 percent yoy declines in net earnings. Thus far, the non-financials (rated as well as non-rated companies) have booked an overall contraction of 2.3 percent in revenue, 9.4 percent decline in operating profit and 10.2 percent drop in net profit. At this stage of the cycle, we believe Indonesia's Q1 2015 gross domestic product (GDP) growth is likely to dip below 5 percent.
Furthermore, we believe weak Q1 2015 economic reports are likely to persist in forecasts for Q2 2015. Recent data such as the all-time low purchasing managers' index (PMI) of 46.4 in March, would suggest that a rebound could only occur in Q3 2015, particularly given the current economic deceleration which has persisted into April and is likely to linger in the next couple of months.
Note that based on data from the Public Works and Public Housing Ministry, only 31.7 percent of infrastructure tenders have been awarded (table 3). This is way behind President Joko 'Jokowi' Widodo's plan of finishing all tenders by the end of March 2015.
In line with Indonesia's Q1 2015 subdued economic performance, which is likely to persist into Q2 2015, we are currently looking at earnings per share (EPS) growth of just 11.7 percent for the full-year 2015, compared to Bloomberg's consensus growth of 16.3 percent. We would expect earnings revisions by the street assuming we are correct.
The main difference in our more conservative forecasts is in the plantation, coal, metals and oil and gas sectors. On valuation, based on our earnings estimates, the Indonesian market is currently trading on 2015 forecast price earning (PE) of 20.1x, the region's most expensive, despite a recent 2.6 percent market drop.
Due to the current economic slowdown, our top 10 picks are mostly defensives (staples and telecommunications companies). For our top sells, we continue to dislike the consumer discretionary sector, including automotive, particularly given lower GDP outlook. Lower ad-spend should adversely impact media companies while taxi companies could suffer from lower tariffs.
Other government policy risks include the Single Presence Policy (media), zoning (retailers) and electronic road pricing (ERP) for automotive. For AKR Corporindo Tbk (AKRA), we think stock will be hit by Bank Indonesia's policy to disallow foreign exchange transactions locally starting July 1, 2015, as well as the current low oil price environment.
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The writer is senior associate director and head of research at Bahana Securities.
