JP Morgan - What Happens if the Euro goes to Parity, Oil to 60$ and Europe double dips - Indonesia Impact by sector

Indonesia: Overview
The first order effects on earnings: The first order effects on earnings are likely to be on the commodity stocks. During the 1998 crisis, coal prices went as low as $60, which have a lagged earnings impact (10% change 20-25% earnings effect for most large names) but immediate impact on stock prices. Nickel stocks carry a 20% earnings risk for a 10% move in Nickel prices. Commodity weaknesses would more than offset currency positives.

First order effect on valuations: An aggressive decline in risk premiums drove the Indonesian 10 year bond rate down by 125 bps over March-April. This was a principal factor in Indonesian equities rerating higher recently. A reversal in sovereign risk appetite (compounded by the resignation of the finance minister this week) has resulted in the 10 year bond yield increasing sharply in the last couple of days, and this could create downside risk for Equity valuations across the board with larger risks to commodity names, in our view.

Positive First Order Effects: Lower Energy prices are positive for cement companies, which now have minimal exports. Lower capex is possibly a fall out from a weak Euro. Lower Oil prices are also positive for margins at Unilever (A 10% decline in oil prices improves EPS by just under 5%), although offset in both cases partially by a weaker currency.
Negative: Coal (BUMI, ADARO, PTBA), Nickel (INCO, ANTM)

Positive (We recommend investors Buy on the Dip): SMGR/INTP, UNVR, BBCA (BCA's uniquely liquid balance sheet and deposit franchise come to the fore during a crisis, and valuation risks are coming off sharply).


BANKS
First Order Market Impact: The main driver of the banks rerating recently has been bond yield compression. This should reverse and result in lower PBVs across the board. Deposit franchises become more valuable.

First Order fundamental Impact: Nominal working capital demand would be weak (and inflation weak) - this would probably mean that loans growth will see downside risk (from the 16-18% we think plausible now, Central Bank claims >20% possible). Investment loan demand in sectors like plantations could slip (plantations are about 5% of loans for the big banks - BCA 5.2%, BMRI 13.8% of loans ex-consumer/micro, BBRI 33.5% of corporate loans are to Agri business). As long as CPO prices stay above 1800 Rgt, we do not think there will be credit stress in the sector, i.e. there was minimal credit stress during the 2008 crisis. Some possible stress in asset quality in commodity/trade facing sectors - SMEs to a degree (textile exporters etc), but also metal processors etc (RM inventory needs to get marked down).

Positive First Order impact: If bond yields rise and we see tightening liquidity, we believe BCA will benefit as it will have sticky liability costs and pricing power on the assets side.

Consumer Discretionary (Astra)
First order Earnings impact: Negative for Astra Agro Lestari, and to a lesser extent United Tractors.

First Order market impact: Negative. Astra is well owned, and could suffer from a reversal in appetite for risk assets.

Positive first order earnings impact: Weaker Rupiah benefits United Tractors (about 20% of Astra’s Net profits).

PLANTATIONS
First Order market impact: Crude Palm Oil and Rubber prices tend to be correlated to crude oil prices. Stocks track the underlying commodity. Plantation stocks across the region have a high correlation (>0.95) to palm oil prices and this would open up significant downside to the sector. Specialty Agri funds are about $7.4bn in AUM, and while they have not seen major inflows recently, outflows could generate volatility in the relatively thin market for traded palm oil.

First order Earnings impact: EU is about 12.5% of world CPO demand, and EU consumption grew by 13% in 2010. Both edible oil use and bio diesel are factors in the EU and we think both will be impacted if a) the EU slips into recession and b) Oil prices slip to $60 /bbl. In this environment we think it conceivable to see a 15-20% downside to CPO prices (to about M$2000). For the Indonesian upstream names, a 10% change in CPO prices would make a 15-20% difference to profits.

Positive first order earnings impact: The positive rub off from lower oil prices will be in fertilizer prices. Fertilizer accounts for 25-30% of costs and hence a 10% decline in fertilizer prices could have a 2-3% impact on margins, in our view. Lower fertilizer prices will benefit upstream planters more than downstream processors, we believe.

Utilities (PGAS)
First Order Earnings Impact: No impact from Euro to earnings or PT. Possibly some risk to demand from export oriented industries, but pent up demand should be able to absorb any shortfall for industrial demand.

First Order Positives: If the price of oil decline to US$60, this would potentially benefit PGAS as new gas contract pricing could be lower. Selling price unlikely to be adjusted downwards. For every 10% movement in gas purchase price from the current US$2.6/MMbtu, we estimate the EPS will change by 9.5%.

First Order Market Impact: Potentially a defensive, the stock is also a Rupiah depreciation beneficiary

Coal
First Order Earnings Impact: If Oil goes to $60, and we see a European double dip – coal demand and prices are both likely to suffer. Negative for the sector. Indonesian coal producers largely sell on contract – and hence earnings impact is likely to be lagged. A 10% change in coal price (currently benchmarked at $90), we estimate will cut earnings by 20-25% for all the majors under coverage except ITMG (12.5% earnings impact).

First Order Positives: Lower oil price benefits input costs, so immediate term earnings impact may be positive (sell on contracted coal prices but buy fuel on spot). A 10% change in Oil prices would have about a 2% impact on EPS, in our estimate.

First Order Market impact: Negative. Coal stocks respond to spot coal. If oil prices decline to $60 we think a decline in spot coal may be inevitable.

Metals
First Order Earnings Impact: Industrial metals like Nickel are likely to fall – which is negative for INCO & ANTM (10% drop in Nickel is about a 20% drop in Net profits for the sector).

First Order Market Impact: Negative, if Nickel prices drop the stocks are likely to decline in tandem.

First Order Positives: A 10% change in ANTM could see some positives. A 10% change in Gold would in our view have about a 5% impact to profits. Likewise, costs should also see some positives from lower oil prices.

Consumer Stocks
First Order Earnings Impact: Negative for Indofood (CPO)

First Order Market Impact: Neutral (UNVR), Negative (Indofood) as markets react to lower CPO prices and reduced probability of consumer generating anticipated value.

First Order Positives: Positive for Unilever (sales not impacted, but packaging and input costs decline). A 10% decline in oil prices, we estimate will make a 5% difference to earnings.

Cement
First Order Earnings Impact: Minor. Cement companies now have less than 10% of volumes from exports.

First Order Market Impact: Neutral

First Order Positives: Cement companies now have minimal exports. However costs are geared to oil prices and a drop in crude oil to $60 could have a positive margin impact. Some benefit for SMGR in capex since they order equipment for their expansion from FL Smith, which would be denominated in Euro.