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Indonesia market update Daiwa – Bahana Securities : 3Q16 results round-up


The Good, the Bad & the Ugly

*3Q16 corporate earnings: Operating weaker, net profit stronger

Thus far, 88 companies (out of 102 stocks) within our coverage, or 81.9% of total JCI’s market capitalization, have announced their 3Q16 results. In our view, the current market upcycle is somewhat supported by relatively solid 3Q16 earnings performances from stocks under our coverage. From the 88 stocks under our coverage, overall 3Q16 operating-profit growth reached 6.6% y-y, slightly weaker than the 3Q15 level of 8.3% (exhibit 2).

However, on the bottom line, earnings accelerated to 11.2% on a y-y basis, compared to a 5.7% y-y decline in 3Q15, helped by currency gains from IDR appreciation (current: IDR13,051/1USD; 3Q15: IDR14,651/1USD). Note that our sensitivity analysis indicates that, for every 1% IDR appreciation, market EPS growth would rise by 0.7%. Compared to our expectation, banks generally booked better-than- expected results, while cement and property companies booked lower-than- expected results.

*5,600 index target with political jitters to provide buying opportunity

With result improvements for the most part, we retain our positive view on the index with our 2016-end target of 5,600, before rising to 6,600 in 2017, assuming further interest rate cuts and stronger IDR, backed by the government’s successful tax amnesty program. At this stage of the market cycle, we believe excessive political jitters stemming from 4 November planned.

The Good: Poultry, Infra, Staples, Plantations

Within this section, our preview was spot on in identifying all sectors that would report higher than average market growth rates. In this regard, the Plantation companies posted 31% q-q net profit growth on the back of production recovery post La Nina, despite slightly lower global CPO prices by 1.6% q-q, which averaged USD639/ton in 3Q16.

On poultry, 3Q16 earnings remained solid, mainly supported by high DOC and broiler prices following the 3mn PS culling and lower GPS import quota back in 2015. On the other hand, we saw a decline in the feed margins for the quarter due to the recovery of soybean meal prices. Looking ahead, feed-millers have adjusted up the higher raw materials prices in 4Q16, and should result in margin normalization. Going into 2017, the poultry industry should still benefit from higher poultry prices.

We believe DOC supply recovery would only be realized in 2018. For the Consumer sector, the performance of the staples was stellar, with overall margin improvements from IDR appreciation and coupled with benefits from low commodity prices in 1H16. On the tobacco sector, HMSP and GGRM booked slightly lower than consensus’ estimates due to continued industry’s volume decline for the quarter (3Q16: -4.3% y-y). On Infrastructure, companies within our coverage universe continued to book strong earnings growth due to robust order books and solid project realizations.

The Bad: Oil-related, Banks, Auto, Metals, Telco

For the most part, this “bad” sector, with mixed earnings results, was in line with our expectations with the exception of the banking sector. Beyond our expectations, Banks performed much better in 3Q16, booking relatively solid earnings growth of 7.3% y-y despite slower loan growth and continued high NPLs. This 3Q16 set of results was backed by higher net interest incomes due to lower blended cost of funds and by higher non-interest incomes on efficiency initiatives.

The Oil-related sector continued to perform much better in 3Q16 on higher oil prices on supply cut speculations. However, operating profit performance was dragged down by WINS and AKRA due to lower volumes and rates. On the Auto sector, despite lower growth from dealership restructuring, ASII still managed to improve its net profit on higher volumes and ASP. Note that ASII also managed to book higher operating margin and equity incomes. For GJTL, the stock benefited from the stronger IDR environment as most of its costs are dollar linked while its borrowings are dollar-denominated. On the Telcos, players continued to benefit from solid data growth with TLKM booking solid margins and healthy net profit growth due to improved network quality. On the flip side, EXCL experienced lower margins as the company attempted to regain its subscribers, while at the same time was hurt by high interest expenses.

For metals, the sector performed much better in 3Q16, compared to 3Q15’s level, mainly due to lower worldwide supply of metals and stronger demand recovery. On top of that, most metal companies have been attempting to reduce their costs by using improved and more efficient technologies. However, metal companies’ operating earnings were hurt by the weak performance of PSAB, which reported operating loss of USD20mn in 3Q16 from USD38mn in 3Q15.

*The Ugly: Coal-related, Property, Cement, Discretionary 

In this last and worst category, the presence of the property and cement sectors was not entirely unexpected, although we had anticipated somewhat better results. Despite current stronger IDR, lower BI rates and LTV loosening, the Property sector has continued to perform poorly, hurt by last year’s weak marketing sales on the back of government’s aggressive taxation drive as well as regulation uncertainty (e.g. Luxury tax).

On the consumer side, Discretionary plays were quite mixed with MAPI, RALS, and ERAA, having booked higher-than-expected earnings due to their turnaround stories, while LPPF and MPPA’s results were quite disappointing due to weak SSSG. Note that ACES and TELE booked in-line performances.

On the cement front companies booked disappointing results on the back of weak volumes due to competition and low ASP due to price wars. The coal mining sectors performance was poor due to unexciting performance from UNTR, which experienced lower rates on its mining contracting business and PTBA, which experienced low ASP due to weak seaborne market demand. However, Adaro booked solid results due to its efficiency initiatives to lower production costs. Nevertheless, we expect improved performances for coal companies in the coming quarters.

by Harry Su, Head Analyst of Bahana Securities



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Indonesia market update Daiwa – Bahana Securities : 3Q16 results round-up

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