The Jakarta Post
Going into 2016, we present our macro and market summary as follows. We expect the current account deficit (CAD) ' which stood at 1.86 percent of the country's gross domestic product (GDP) in the third quarter of 2015 ' to rise to 2 percent of GDP in 2015 and 2.3 percent in 2016 on higher imports, as the economy picks up, leading to a slightly weaker 2016 exchange rate of Rp 14,500 against the US dollar.
On the consumer price index (CPI), we estimate 2015 inflation of around 3 percent to remain manageable below the 4 percent level in 2016 and possibly fall to 3.7 percent, assuming 10 percent lower fuel prices.
For Bank Indonesia's (BI) policy rate, we expect a 25 basis point (bps) rate cut in the first quarter of 2016 and a total decline of 75 bps to 6.75 percent for 2016, which would be one of the biggest rate cuts in the region in 2016.
The 2015 GDP growth rate of 4.72 percent should rise to 5.1 percent in 2016, which would be one of the highest globally. The 2016 index target of 5,100 is backed by an expected 14.3 percent year-on-year (yoy) increase in earnings per share (EPS) for the market, following the 7.5 percent yoy EPS contraction in 2015.
With the Jakarta Composite Index (JCI) having been one of the worst performing markets in the region recently, Indonesia's valuation has become more reasonable at a 2016 forecast price-to-earnings (PE) ratio of about 16.
Excluding PT Hanjaya Mandala Sampoerna (HMSP) and PT Unilever Indonesia (UNVR), the JCI trades at a 2016 forecast PE ratio of around 13, making it the third-cheapest market in the region. In terms of the price-earnings to growth (PEG) ratio, the Indonesian market would also be quite attractive at 0.8. The biggest risks for the market include the tax amnesty not being a game changer and continued tax revenue shortfall. At this stage, we do not believe that the tax amnesty program will be a game changer, particularly given market rumors that there would be a reduction in the amnesty fine to below the 2 percent level, suggesting a likely lower contribution to government coffers in 2016. Note that in 2015, tax revenue excluding duties only reached Rp 1,055 trillion (81.5 percent of the target), up just 7.1 percent yoy and translating to a shortfall of Rp 239.3 trillion.
Going into 2016, we forecast 0.7 percent yoy growth in tax revenue, as we expect the tax amnesty program and lower tax rates to hurt tax collection, resulting in a Rp 300 trillion tax revenue shortfall, or
a 2.7 percent budget deficit.
As for sectors, our likes and dislikes are as follows. Overweight on consumer staples; our bigger-cap stock picks are UNVR and PT Indofood CBP Sukses Makmur (ICBP); In smaller caps: PT Nippon Indosari Corporindo (ROTI). Risk: a weaker rupiah given the sector's high US dollar-linked raw material procurement.
In cigarettes, we like both HMSP and Gudang Garam (GGRM) due to their solid balance sheets and minimal US dollar exposure. Risk: health-related policy risk. In healthcare, our top hospital pick is PT Siloam International Hospitals (SILO), trading at a 65 percent discount to PT Mitra Keluarga Karyasehat (MIKA) on 2016 forecast EV/EBTIDA. Our top pharma pick is PT Kimia Farma Persero (KAEF) on its undemanding valuation. Risk: government price caps on medicines.
In shipping, our top sector pick is PT Pelayaran Tempuran Emas (TMAS) by virtue of its fleet and route expansion, which should allow both top line and earnings to double by 2017. Risk: higher global oil prices.
For telecommunications, our sector overweight stance is led by PT Telekomunikasi Indonesia Persero Tbk (TLKM) as our top operator, followed by PT Indosat (ISAT) on earnings recovery and lower foreign exchange losses due to greater rupiah stability. Risk: policy risk on lower tariffs, although this is unlikely, as Indonesia's pricing is one-tenth of Singapore's.
We are neutral on the banking sector. PT Bank Negara Indonesia (BBNI), Bank Rakyat Indonesia (BBRI) and PT Bank Tabungan Negara (BBTN) are our top sector picks, followed by PT Bank Central Asia (BBCA), PT Bank Mandiri (BMRI) and PT Bank Pembangunan Daerah Jawa Barat & Banten (BJBR). Upside risk: higher GDP growth; downside risk: weaker rupiah.
In construction and toll roads, our top picks are Waskita Karya (Persero) (WSKT) with solid earnings visibility and PT Adhi Karya (Persero) (ADHI), with most attractive valuation. Upside risk: lower interest rates; downside risk: reduced state spending on tax receipt shortfall.
As for the consumer-discretionary sector, our top pick is PT Matahari Putra Prima (MPPA) as the most 'defensive' in the sector due to its grocery-led products. Upside risk: commodity rally to fuel farmers' incomes; downside risk: lower-than-expected same-store sales growth (SSSG) on slow GDP growth.
Among industrial estates, our top sector pick is PT Puradelta Lestari (DMAS). The sector's strongest nine-month marketing sales of 90 hectares in 2015 and zero US dollar debt). Upside risk: higher presales; downside risk: slow infrastructure development.
In the media sector, we favor PT Media Nusantara Citra (MNCN), as most of the bad news looks priced in, and we remain cautious on PT Surya Citra Media's (SCMA) valuation despite our more positive view on the stock of late. Upside risk: digitalization with current free-to-air (FTA) TV players as multiplexers. Downside risks: softer GDP growth and stricter interpretation of Regulation No. 50/2005.
In metals and mining, PT J Resources Asia Pasifik (PSAB) is our top pick on sizeable production growth (through the Pani mine, up 20 percent) amid a more stable gold-price environment.
In the oil and gas sector, downside risks include lower oil prices for PT Medco Energi International (MEDC) and for AKR Corporindo (AKRA) and possible foreign entry into their distribution and logistics businesses, while for PT Perusahaan Gas Negara (PGAS), government-related policies on lower gas prices are a risk. Upside risks: higher oil and gas prices.
With poultry, PT Malindo Feedmill (MAIN) is our top pick due to its cheapest valuation with solid corporate governance. Upside/downside risks: Stronger/weaker-than-expected rupiah depreciation due to the sector's large US dollar borrowings.
In plantations, our top pick is London Sumatra Indonesia (LSIP) on its zero debt position, while for the smaller-cap stocks, we like PT Sampoerna Agro (SGRO) and PT Dharma Satya Nusantara (DSNG) on their still-growing mature areas. Upside risk: higher B20 biodiesel demand; downside risk: low soybean prices.
We are underweight on the automotive-related sector, retaining our negative view on Astra International. (ASII) and PT Indomobil Sukses Internasional (IMAS) on continued discounting and intense competition. On the flip side, Gajah Tunggal Tbk. (GJTL) is a buy on its attractive valuation and earnings recovery. Risks: higher margins (ASII), higher sales (IMAS) and weaker rupiah (GJTL).
In cement, our negative view is premised on the oversupply and intense competition, with PT Indocement Tunggal Prakasa (INTP) being our top sell on expensive valuation. Key risk to our call is stronger-than-expected GDP growth.
In coal and mining, we prefer companies with greater stability due to their large local coal portions:
PT Bukit Asam (Persero) (PTBA) with 52 percent and PT Adaro Energy (ADRO) with 21 percent. Risks to our call on the sector are faster construction of power plant projects and higher coal prices.
With land transportation, PT Blue Bird (BIRD) is our top sell on intense competition from mobile-based new entrants, lack of drivers and headwinds from government policy risk.
PT Adi Sarana Armada (ASSA) is the only buy in the sector, as rental car demand remains stable. Upside risk: higher-than-expected consumer spending on taxis.
Property: With poor marketing sales in 2015, earnings in 2016 will be depressed, in our view, while lower property prices cloud the discount to net asset value (NAV) valuation. Our top sector pick is PT Summarecon Agung (SMRA) on its Bandung success, no US dollar debt and 28 percent recurring base. On the other side, Agung Podomoro Land (APLN) is our top sell, due to high reclamation costs.
The writer is the head of research and strategy at PT Bahana Securities.
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