Indonesian Stock Market Outlook Seven reasons why Indonesian stocks deserve attention

Transcription

1 214 KDB Daewoo Securities Investment Seminar Indonesian Stock Market Outlook Seven reasons why Indonesian stocks deserve attention Seven reasons why Indonesian stocks deserve attention... 3 I. Economic growth nearing inflection point... 4 II. Improving business fundamentals... 5 III. Reforms are positive to corporate earnings... 6 IV. Foreigners are back... 7 V. Beginning of interest rate downcycle... 8 VI. Attractive dividend yield... 9 VII. Known risks are no longer risks... 1 Sector outlook Top picks Senior Analyst Taye Shim taye.shim@dwsec.com

2 [Summary] Seven reasons why Indonesian stocks deserve attention Buy Indonesia! Why Rationale 1. Economic growth nearing inflection point GDP growth 5.8% ( 13) à 5.2% ( 14) à 5.5% ( 15) 2. Improving business fundamentals Corporate debt ratio 143% ( 98) à 43% ( 14F) 3. Reforms are positive to corporate profits Annualized stock market return 49% (Election year) vs. 15% (Normal year) 4. Foreigners are back Foreign net buying -US$2.6bn ( 13) vs. US$24.6bn (1Q14) 5. Beginning of interest rate downcycle 214 1Y treasury yields 9.% (Jan.) à 8.3% (Feb.) à 8.% (Mar.) 6. Attractive dividend yield US$1, investment in 23 Cumulative dividend: IDR91.75mn (1.1x principal) 7. It s baked in the cake Risk factors Risks have already been identified and priced in 2H14 Indonesian stock market outlook 2

3 [Reason 1] Economic growth nearing inflection point Inflection points in GDP growth are a key variable of stock market performance Despite external shocks, the Indonesian economy has remained stable on abundant domestic demand Stable growth cycle to begin in 2H as economic reforms gain momentum after the elections Our 214F JCI target range: 4,44-5,47 GDP growth and JCI (p) 6, JCI (L) 214F JCI target: 5,47 (+1.4% from May 9 th closing price) (%) 7. GDP growth (YoY, R) Fed tapering Widening current account deficit 5, 6.5 4, 28 global financial crisis 6. 3, 5.5 2, 1, Market tends to lead inflection point by 12 months Market tends to lead inflection point by 12 months /3 12/4 12/5 12/6 12/7 12/8 12/9 12/1 12/11 12/12 12/13 12/14 12/15 2H14 Indonesian stock market outlook 3

4 [Reason 2] Improving business fundamentals Confidence in corporate profits Business fundamentals have continuously improved following the 1998 Asian financial crisis Stable ROE, backed by strong fundamentals JCI-listed companies have an average ROE of 21.1%, well above the global (11.9%) and emerging market average (12.6%) Average debt ratio of listed companies ROE is rebounding (Debt ratio, %) (%) LQ45 JCI 45 4 Indonesia World (MSCI) Emerging market (MSCI) F /14 Source: Bloomberg, KDB Daewoo Securities Indonesia Notes: Average of IDX-listed stocks Source: Bloomberg, KDB Daewoo Securities Indonesia 2H14 Indonesian stock market outlook 4

5 [Reason 3] Reforms are positive to corporate profits The Indonesian stock market delivered its strongest performances during presidential election years The stock market rose an average 49% during presidential election years, far above the normal average (+15%) Post-election, the government tends to frontload policy stimulus Need for reform à Increased fiscal spending & private investments à Economic growth à Improved profits à Higher share prices Profits tend to improve after presidential elections (%) /14 Notes: Based on LQ45 Source: Bloomberg, KDB Daewoo Securities Indonesia ROE JCI tends to perform strongly in election years Year JCI Return (%) President Ruling party Wahid PKB Megawati PDI-P , Yudhoyono Democratic party 25 1, , , , , Yudhoyono Democratic party 21 3, , , , Wahid impeached 1Q14 4, Jokowi vs. Prabowo PDI-P vs. Gerindra Notes: 1Q14 stock market performance based on QoQ 2H14 Indonesian stock market outlook 5

6 [Reason 4] Foreigners are back Foreign net buying is a key determinant of the stock market s direction Foreigners as a share of overall trading value has been increasing, suggesting that foreign investors view Indonesian assets as attractive Foreigners were net sellers in 213 due to Indonesia s growing fiscal deficit, but have switched to net long position this year Since the global crisis, JCI has moved in line with foreign positions à Foreign net buying is a major market driver Share of foreign trading has been increasing after the crisis Foreigners have switched to net long positions 1% 9% 8% 7% (IDRtr) Net foreign buying (L) JCI (R) (p) 6, 5, 4, 6% 1 5% 3, 4% 3% -1 2, 2% 1% , % Q14 Source: IDX, KDB Daewoo Securities Indonesia Source: IDX, KDB Daewoo Securities Indonesia 2H14 Indonesian stock market outlook 6

7 [Reason 5] Beginning of interest rate downcycle Negative correlation between interest rates and asset prices Interest rates: A barometer of risk à Reduced fiscal deficit, stable inflation and political stability are conducive to lower interest rates Interest rates: A barometer of the value of money à Falling rates = Rising asset prices à Focus on highly marketable assets, such as stocks Improving data to lead to lower interest rates (%) (%) 4 3 Current account/gdp (L) 1Y gov't bond yield (R) CPI growth rate (R) Negative correlation between interest rates and asset prices (%) (%) 1Y gov't bond yield (L) JCI growth rate (YoY, R) Q14A Bond yield: 8.% (YoY) Q14A Change in JCI: 11.6% (YTD) Q14F F -6 Source: Central bank, Bloomberg, KDB Daewoo Securities Indonesia Source: Bloomberg, KDB Daewoo Securities Indonesia 2H14 Indonesian stock market outlook 7

8 [Reason 6] Attractive dividend yield High dividend payout USD1k investment in 23 would have returned a dividend yield of 115% in Indonesia vs. 44% in Korea Bank Central Asia share price and DPS Shinhan Financial Group share price and DPS (IDR) Dividends per share (L) Stock price (R) , (IDR) 12, 1, 8, 6, 4, 2, (W) , Dividends per share (L) Stock price (R) , (W) 6, 5, 4, 3, 2, 1, Bank Central Asia case study (USD1, = IDR84,813,) Shinhan Financial Group case study (USD1, = W11,886,4) (%) Capital gains: IDR894,976,17 (1.6x) Dividend income: IDR91,753,173 (1.1x) Holding period: 1 yrs (yr) (%) Capital gains: W18,863,257 (1.6x) Dividend income: W4,875,738 (.4x) Accum. div. yield/investment: 44.3% (yr) 2H14 Indonesian stock market outlook 8

9 [Reason 7] Known risks are no longer risks The four largest risks threatening the Indonesia market are already priced in Fed tapering China s hard landing Deterioration of fiscal balance Election uncertainties Widely expected since May 213 Bond purchases reduced by USD2bn/month Continued credit risks in China First bond default in Apr. 214 Preemptive response 1Q fiscal deficit was equal to 2% of GDP Rising visibility Jokowi support rate: 45% Reflected in currency & asset prices Growth driver to shift from investment to consumption Improved economic fundamentals A predictable uncertainty Reduced risks à Lower cost of capital à Valuation re-rating 2H14 Indonesian stock market outlook 9

10 Industry outlook Cyclical sectors look promising, including banking, real estate/construction, infrastructure, consumer discretionary, and media, in light of an economic recovery Banking Real estate/construction Industry Major stocks % of market cap Rise YTD ROE 214F P/E Outlook Infrastructure/telecom/utilities Consumer discretionary Media Consumer staple Industrial materials Machinery Mining Bank Central Asia Bank Rakyat Indonesia Bumi Serpong Damai Adhi Karya Telekomunikasi Indonesia Perusahaan Gas Negara Astra International Matahari Dept. Store Surya Citra Media Media Nusantara Citra Unilever Indonesia Indofood Sukses Makmur Semen Indonesia Indocement Tunggal United Tractors Hexindo Adiperkasa Adaro Energy Vale Indonesia 21.8% 23.7% 19.1% 11.1x 1.3% 36.3% 2.6% 13.5x 12.3% 18.% 18.6% 27.x 8.5% 25.7% 2.7% 21.5x 3.4% 12.5% 28.4% 22.4x 12.9% 25.7% 23.% 21.6x 4.2% 13.5% 2.1% 15.7x 2.2% 8.3% 17.1% 18.2x 3.3% 11.3% 14.8% 16.x Healthcare Kalbe Farma 1.6% 23.2% 25.3% 31.6x Plantation Astra Argo Lestari Smart 1.5% 14.2% 25.1% 17.1x Notes: P/Es are based on Bloomberg consensus as of May 9, 214; 2H14 Indonesian stock market outlook 1

11 Top picks : Bank Rakyat Indonesia TP: IDR11,5 Upside: +13.6% Rise YTD: +39.7% Shares of Bank Rakyat Indonesia to continue to rise on expectations of improving economic fundamentals Stable loan growth likely amid a turnaround in the economic cycle Valuation: Trades at 214F P/B of 2.6x, 13% higher than the financial sector average P/B of 2.3x Technical analysis: Likely to break above previous high Share performance (BBRI) Company overview Company name: Bank Rakyat Indonesia Ticker: BBRI IJ Equity Industry: Banking Overview: Established in 1895; Specializes in microcredit; Ranks second in market cap within the sector; Offers deposit and loan products via 4, branch offices nationwide Largest shareholder: Indonesian government (7%) Financials F Market cap (as of May 9) IDR25tr OP margin 49.8% 47.8% Net profit IDR21.3tr IDR23.8tr ROE 29.7% 26.8% P/E 8.4x 1.5x P/B 2.3x 2.6x 2H14 Indonesian stock market outlook 11

12 Top picks : Perusahaan Gas Negara TP: IDR5,8 Upside: +1.% Rise YTD: +17.9% Engages in natural gas development and distribution; Holds market dominance LNG demand to steadily increase through 215 à Earnings to improve Valuation: Trades at 214F P/E of12.7x, lower than the telecom/infrastructure/utilities sector average [Technical] MACD and PSAR indicators are rising; Stochastic indicator is neutral Share performance (PGAS) Company overview Company name: Perusahaan Gas Negara Ticker: PGAS IJ Equity Industry : Utilities Overview : Established in 1965; Engages in natural gas development and distribution; The total distance of gas distribution pipelines is 3,187km. Largest shareholder : Indonesian government (57%) Financials F Market cap (as of May 9) IDR128tr OP margin 31.2% 31.1% Net profit IDR8.9tr IDR1.tr ROE 36.3% 3.1% P/E 9.2x 12.7x P/B 3.5x 3.8x 2H14 Indonesian stock market outlook 12

13 Top picks: Astra International TP: IDR8,3 Upside: +11.% Rise YTD: +9.9% Holds the largest market shares in the automobile and motorcycle markets; Expect steady growth in line with the economy New businesses (power generation, port management, real estate development, etc.) to diversify revenue sources A proxy investment for the Indonesian stock market; Supply/demand conditions expected to improve thanks to Indonesia s economic reforms Technical analysis: To remain on the uptrend, MACD and PSAR are on the rise Share performance (ASII) Company overview Company name: Astra International Ticker: ASII IJ Equity Industry: Consumer discretionary (Automobile) Overview: Established in 1957; Businesses: Automobile (53%), financial services (7%), machinery/mining (28%), plantation (7%), infrastructure (4%), IT (1%); Second-largest market cap in the JCI Largest shareholder: Jardine Cycle & Carriage (5.1%) Financials F Market cap (as of May 9) IDR33tr OP margin 9.6% 9.6% Net profit IDR19.4tr IDR21.tr ROE 25.% 22.9% P/E 14.2x 14.4x P/B 3.3x 3.2x 2H14 Indonesian stock market outlook 13

14 Top picks: Kalbe Farma TP: IDR1,74 Upside: +11.5% Rise YTD: +24.8% Rise in consumers purchasing power and low penetration of healthcare products in Indonesia to drive Kalbe Farma s growth With the implementation of the National Social Security System (SJSN) in January, the government s healthcare and drugrelated spending is likely to increase Valuation: Trades at 214F P/E of 31.8x, a 3.3% premium to the industry average (24.4x) Technical analysis: MACD rebounded, exceeding its historic high à uptrend to continue Share performance (KLBF) Company overview Company name : Kalbe Farma Ticker: KLBF IJ Equity Industry: Pharmaceutical Overview: Established in 1966; An integrated consumer health and nutrition company; Businesses: Distribution (36%), pharmaceuticals (24%), health supplements (24%), consumer health products (16%) Largest shareholder: Indonesian government (51%) Financials F Market cap (as of May 9) IDR73tr OP margin 15.9% 16.5% Net profit IDR1.9tr IDR2.3tr ROE 25.3% 25.2% P/E 3.5x 31.8x P/B 6.6x 7.8x 2H14 Indonesian stock market outlook 14

15 Top picks: Japfa Comfeed Indonesia TP: IDR1,715 Upside: +22.9% Rise YTD: +14.3% Focused on chicken business (from production to processing to distribution) Per capita chicken consumption in Indonesia is the lowest level in Asia, but is showing steady growth: 7.kg (212) 8.1kg (213) Valuation: Trades at 214F P/E of 11.3x, a 19.3% discount to the industry average (14.x) Technical Analysis: Broke through resistance; MACD is decreasing, but a golden cross is forming in the stochastic line Share performance (JPFA) Company overview Company name: Japfa Comfeed Indonesia Ticker: JPFA IJ Equity Industry: Consumer goods (food production) Overview: Established in 1971 with a focus on poultry (production to processing); Major business areas include: animal feed (51%), farm operation (25%), chick breeding (1%), consumer edibles and other (14%) Largest shareholder: Malvolia (57.5%) Financials F Market cap (as of May 9) IDR15tr OP margin 8.5% 8.9% Net profit IDR.6tr IDR1.2tr ROE 13.1% 21.7% P/E 21.8x 11.3x P/B 2.7x 2.5x 2H14 Indonesian stock market outlook 15