Macquarie Indonesia strategy - More to come

Thursday, 07 May, 2009
INDONESIA
Indonesia strategy - More to come

Event
Our regional strategists, Tim Rocks and Daniel McCormack, have just published their quarterly strategy report (4 May 2009), maintaining their Overweight stance on Indonesia. We provide reasons to remain Overweight the Indonesian market from a bottom-up view.

Impact
Resilient demand and rebound in data points: Despite the slowdown in economic growth since 4Q08 (5.2% YoY in 4Q08 and 4.3% in 1Q09), the Indonesian consumer appears to be weathering the downturn fairly well. Car, motorcycle and retail sales data indicates a slowdown in the first two months of the year, but the latest data shows a rebound (Figures 3–6). Credit growth and value-added tax receipts have picked up in April. T he upcoming presidential elections should also provide a boost to the cash economy and consequently consumer spending.

Better-than-expected 1Q09 results; consensus upgrades to continue . Based on our analysis, overall net profit in 1Q09 was up 39% QoQ and 13% YoY. This strong performance beats our and consensus estimates (Figure 7). The bank, cement, automotive and coal sectors all posted strong 1Q09 results. After six months of downward earnings revisions since October 2008, analysts upgraded their earnings estimates by 12.8% in April following strong 4Q08 results; we expect the upgrades to continue with the strong 1Q09.

Supportive macro-economic environment. Inflation eased to 7.3% YoY in April (0.05% YTD) from the peak of 12.2% in September. The sharp decline in inflation sets the stage for Bank Indonesia (BI) to lower rates towards 6%, in our opinion, vs the current 7.25% (there is an inverse relationship between the SBI rate and index performance) The trade surplus widened in March towards US$2bn and the current account returned to surplus in 1Q09. The relatively better economic outlook and the stable rupiah have also helped to attract portfolio capital back into the market.

Stable political environment – SBY likely to be re-elected. Despite the split between incumbent Susilo Bambang Yudhoyono (SBY) and Jusuf Kalla, we believe that SBY will likely be elected for a second term. Three candidates are running in the presidential elections, but it is almost certain that no one would be able to beat SBY. If re-elected, we believe SBY should use this renewed political capital to advance reforms, and thus help sustain the currently smooth-going reform process over the medium term.

Outlook
Remain bullish on the market; our top picks. Despite its strong performance YTD, the market's current consensus valuation is still attractive at 2009E PER of 12.0x, a 26% discount to the average regional valuation. Given the better-than-expected earnings so far and positive outlook, we suggest that investors focus more on high beta rather than defensive stocks, although we continue to like the domestic market-oriented sectors. Our top five large-cap picks are Astra International, PGAS, Indocement, Danamon and BNI