Bahana Securities The Spotlight Amid the European debt threat

Indonesia: Small exports to EU, but liquidity could be an issue
As can be observed in exhibit 1, Indonesia ’s direct export exposure towards the European Union (EU) is minimal at 11.4% with exports to the PIIGS ( Portugal , Italy , Ireland , Greece and Spain ) countries at only 3.3%. However, it is worth noting that we also export to Singapore (8.8%) and Hong Kong (1.8%) which are major re-export markets. Hence, including indirect exports, Indonesia ’s exposure to the EU could reach as high as 15% in our view. From a liquidity flow perspective, foreign money has been taken out of Indonesia given that the country, one of the best performing markets, has recently suffered from the “resignation” of Finance Minister of Sri Mulyani, a strong proponent of reforms.

TBLA & coal companies: Most exposed to the EU
Our study on the stocks in our coverage shows that Tunas Baru Lampung (TBLA), a CPO producer, has the single largest exposure to the EU with 95% of its total exports (70% of total sales) to the EU. This is followed by coal counters BYAN and INDY at 15.8% and 12.4% respectively. While overseas fund managers are concerned with companies which have large exposures to the EU for fear of demand slowdown, we believe that both the CPO and coal sectors are relatively defensive. Hence, we expect minimal impact. On the back of the recent rupiah (IDR) volatility, we show in exhibit 3 companies with the largest swings on their bottom lines with the IDR movements. As the IDR appreciates, PGAS, KLBF, UNVR, ISAT and INDF benefit most while dollar earners like TBLA benefit least.

Upgrade market rating to Overweight
While market volatility is not over, we think that Indonesia ’s fundamentals remain intact, helped by its large domestic economy, providing a shield from external uncertainties. Going forward, we expect the EU, through the unprecedented loan package worth at least EUR645b, to do what the Fed had done, and that is to flood the market with liquidity. This will mean that commodity prices will move up again, positively impacting the Indonesian market. Hence, we believe stocks like TINS (BUY–IDR2,250–TP:IDR3,100), ANTM (BUY–IDR2,075–TP:IDR2,500) and ASII (BUY-IDR40,200-TP:IDR48,500) are oversold given that their share prices have fallen 16.7%, 15.3% and 14.7% respectively since the JCI peaked on 30 April 2010 (exhibit 5). However, with volatility remaining, we suggest that investors also add defensive stocks such as TLKM (BUY–IDR7,600–TP: IDR10,300) and PGAS (BUY–IDR3,800–TP:IDR5,000) into their portfolio while avoiding some of the more illiquid small and mid cap stocks. In the current environment where risk aversion is high, we upgrade our rating on UNVR to BUY with TP of IDR17,500, based on 2011 PE of 30x. This increases our index target to 3,200, reflecting 16.8% upside potential. Thus, we raise from Neutral to OVERWEIGHT.