CLSA Market Strategy, Signs of Relief

Nick Cashmore has just written a piece on Indonesia Strategy. Economic conditions remain daunting for Indonesia this year.

BUT there are signs of relief…

For example, palm oil prices have risen 35% this year and anecdotal evidence supports a recovery in farm incomes.

Plus, credit constraints within the banking system are moderating as liquidity continues to build. Banks like Bank Danamon (BDMN IJ) has lowered TD rates from as high as 13% in Feb to 9.5% in March. The spread between 1 month SBI and TD rates are also narrowing (currently 75bps vs. 480bps in Feb). Banks are also lowering their mortgage rates.

We also do not expect widespread manufacturing job losses given that Indonesia’s manufacturing sector has already been significantly restructured. The challenge will be to offer jobs to the 1.8mn new workers entering the workforce each year. Informal sector will continue to play a big cushion to mitigate political and social instability.

Recommendation:
* AVOID cash destroyers and debt heavy companies.
* OWT cash generators like Telkom (TLKM IJ), Indocement (INTP IJ), and Perusahaan Gas (PGAS IJ). All have FCF yields in excess of 10% for 2010.