The Rupiah may still have scope to appreciate: JP Morgan's FX team expects the currency to touch 9,800/$ by the end of 3QFY09. YTD inflation is running at less than 0.1% (something that policymakers have pointed out in every meeting we have had recently), and we estimate that the Rupiah remains more undervalued than recent past on an REER basis. All of these indicate that the currency has the potential to overshoot, and while BI appears to prefer a mildly undervalued currency long term we think it may be comfortable with further appreciation in the currency. Our FX team believes that any pullback would be an opportunity to increase Rupiah exposure.
All equity prices benefit, rather than just imports: We believe the impact on equities from an appreciating currency is broader than on just importers. The currency directly impacts inflation (29% of the basket being forex denominated) and by extension the interest rate outlook. Indonesian equity valuations tend to feature somewhat volatile discount rates and we believe that the overall positive impact from a decline in lower discount rate in Indonesia is the more significant driver of equities impact. All stocks should see upside in valuations from a rising currency.
INDF is our stand out pick: With the exception of Astra most companies with Rupiah revenues and dollar costs (through imported materials, interest or capex) tend to be defensive – TLKM and ISAT (import intensive capex), or Unilever (raw materials). However we flag INDF as a leveraged beneficiary. Earnings benefit (a 5% change in
currency forecast adds 5.3% to net profits). Indofood also carries over $800m in forex debt. We estimate that excluding earnings upside a 5% move in the currency transfers Rp 50 (about 3%) per share in value from debt holders to equity holders.
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