CLSA Indo Strategy - Choose carefully

Nick Cashmore highlighted that Indonesia has been the second best performing market in Asia YTD, +48% in US$ term. Valuations are no longer distressed. In our view, investors should be more cautious about chasing stocks.

Key points from the report:
ASII, UNTR, and BBCA have been the market darling, so not surprisingly valuations look the most stretched.
ISAT, PGAS, and TLKM offer more reasonable value.
Resources: valuations indicate either through cycle earnings or stock prices are rich.
No banks stocks are now trading at distressed valuation multiples.
Cement: valuations look attractive with the exception of SMGR.

CLSA Telkom, sign of stabilization, Indo strategy

Telkom (TLKM IJ), sign of stabilization, from Wilianto, maintain BUY, TP Rp9,000

Wilianto looked at Telkom Indonesia’s 1Q09 results. With the risk of sounding like a broken record, we want to highlight once again that there are signs of earnings stabilization as at TLKM.

Well OK, revenues are not looking great, -2.2% YoY, which reflects weak macro situation. But at least for the first time in many years we see some cost control at TLKM. If we look at operating profit in 1Q09 Rp5.28tn vs. Rp4.7tn in 3Q08 (4Q is strong due to seasonality factor), it looks like things are improving at TLKM. Same thing if you look at it from EBITDA standpoint (Rp8.5tn in 1Q09 vs. Rp7.77tn in 3Q08).

ARPU is still falling 14% QoQ. Don’t expect overnight improvement but competition should be easing and Indo telecom industry is expected to consolidate as smaller operators can no longer sustain their low price high vol business model, due to lack of cheap money.

TLKM has been a big laggard of late and may be seen as a safe heaven for those who seek refuge from market correction.

Key points from the report:
Telkom 1Q09 result shows sign of earnings stabilization as Ebitda and Ebit bounced off the low in 3Q09.
Revenues growth remains absent, reflecting weaker purchasing power and lower tariff.
Costs seem to be under control – finally
Net add is strong
Valuation is not demanding against peers. TLKM is trading at 12.7x 09 CL PE vs. 13.8x for major operators.

CLSA Alternative to play the interest rate sensitives with higher betas would be the property sector

Chris Wood argues that borrowing cost is coming down and it good for local asset price reflation. Indeed, as inflation appears well contained at 7.3%(a disciplined monetary policy where money supply shrunk Vs the west where money supply is expanding in an unprecedented way) the SBI benchmark interest rate has already come down by more than 200bp YTD to 7.25%. Learning a very expensive lesson from loose monetary policies and high debt levels (asian crisis where the Rupiah devalued 80%), this time round, IDR has been one of the best performing Asian currency (strengthening around 6% YTD), we can expect further cuts in the benchmark rate.

This is why banks have done so well but with the major banks approaching 3x book value (see Nick piece today), hardly a bargain anymore. An alternative to play the interest rate sensitives with higher betas would be the property sector. Indonesian property has historically appreciated around the inflation rate and not gone through the boom period like in Singpapore, Hong Kong etc. As such physical property prices has remained resilient, not coming down in the latest economic weakness.

Mortgage rates come down from 15-16% p.a in Jan 09 to 12% and less (some banks such as Niaga (BNGA IJ) and Permata (BNLI IJ) offering around 6% for the first year). Ciputra Development (CTRA IJ) probably the proxy for the sector already has a strong position in the middle-low landed housing segment, but smart property developers such as Summarecon Agung (SMRA IJ) and Bumi Serpong Damai (BSDE IJ) are also trying to capture the falling mortgage rate theme by offering more affordable products. Both these companies showed good marketing sales in the 1Q09 despite tough macro conditions. Jababeka (KIJA IJ) is also interesting industrial estate play with its 130MW power plants (one turbine has been completed) which should provide the company with more than 50% recurrent income.

Property plays makes sense as most are still trading at steep discount to NAV (some on high single digit PE). Even with the current rally, most are still a long long way from peak valuations.

This is clear with the collpase of demand from the west, Asians economies would start to focus more on their own domestic asset market. In China, our CRR study among 80 developers found that 45% of builders on the coast expect a YoY increase in new starts in 2009. As for Indonesia, historical low mortagage rates and low debt levels should continue to underpin a strong property market

CIMB Hexindo Adiperkasa Initiating coverage - Small is beautiful

(HEXA IJ / HEXA.JK, OUTPERFORM, Tgt. Rp2,100, Industrial Goods and Services)

HEXA's sales of small excavators tend to outpace the industry during an upcycle. This coming upcycle should be no different, led by an expected recovery in the agro and construction sectors in 2010. HEXA should report firm 1Q09 profits, with indicated core earnings of around Rp75bn. As the company has signed around US$144m of mining equipment deals for 2009-10, we expect stronger quarters ahead. Initiate coverage with an OUTPERFORM rating and a target price of Rp2,100 (9x CY10 earnings). Catalysts are expected to include further deals with other mining companies.

Goldman Sachs - Commodity - Bridging the gap between a weak today and a strong tomorrow

Our view: After the deflation of the asset bubble caused by hot money flow, we believe that the physical fundamental story still stands in the agricultural commodities space. The demand and supply fundamentals remain supportive in the medium term.

On Demand: In our view, we could have seen the lowest demand levels this quarter. Even as a big producer of soft commodities, China will continue to need to rely on imports to meet its increasing demand, as evidenced by recent increases in soybean prices driven by stockpiling in China.

On Supply: The high capacity utilization currently for the softs makes supply vulnerable to planting delays due to bad weather, thus giving good support to prices.

Inflationary expectation will sustain the money flow into the commodities market, as economic condition stablize. Hence, we remain positive in commodities. Clients can look to nimble on DBA, and invest into Schroder Alternative Solutions Commodity Fund to gain exposure.



GS - Commodity Watch

Commodities have been trading on improving forward-looking macro data, which has reinforced our view of a more positive outlook for demand growth and prices in 2H2009. For this reason, our expectations of a pullback in prices on still-weak current fundamentals have either proven short-lived or have not been realized at all. In our view, commodities can continue to price the more positive forward outlook despite weak current fundamentals as long as inventories can continue to build. But this will likely not be the case for energy, which is already approaching storage constraints.

We also emphasize that improvement in not only forward, but also coincident, indicators in the Chinese economy will likely hasten improvement in fundamentals for agriculture and metals, which are particularly leveraged to Chinese growth. Given the above, we expect three important characteristics of commodities will be key to performance over the next six months:

1) The degree of leverage to China for the commodity. Today, leading indicators look much better than the coincident indicators. China is the exception, where the coincident indicators are positive. Copper, zinc and soybeans have more leverage to China and therefore a stronger near-term outlook.

2) The anticipatory nature of the commodity Storage bridges the gap between today and tomorrow. Commodities that are easier to store, such as metals and agriculture, are more anticipatory. Energy is more costly to store and therefore less anticipatory. Breaching storage capacity would force energy to price today, leading prices lower.

3) The degree of capacity utilization for the commodity Tomorrow, those commodities with the highest capacity utilization rates, such as energy are best poised once global growth resumes.