Indonesia: Election momentum
Issues over the last 12 months
The combination of the reversal in commodity prices and strong imports during 2HFY08 moved the current account into a deficit, bringing unwelcome memories of the crisis, by pressuring the currency and bringing macroeconomic stability under the scanner. Bank Indonesia has cut the policy rate by 225bps since November, and rates in the economy are still declining. Based on a healthy recovery in the Balance of Payments
position, the currency has recovered significantly over the last 2 months. The April 9th parliamentary election went off smoothly, with quick counts pointing to a lead position for president SBY’s Partai Democrat, strengthening his bid for re-election in July.
Outlook
The reassurance of increasing foreign reserves and a surprise return to a current account surplus in 1QFY09 should offset any renewed pressures from global risk aversion on the Rupiah. While growth is still a concern, Indonesia’s large domestic demand base, and its lack of reliance on external capital flows mean that the economy is slated to grow in FY09 (J.P. Morgan estimate: 3.5%). In April, upwards revisions to earnings have matched downgrades for the first time since October, suggesting expectations have declined adequately. 1Q results were largely healthy – with strong performance from some large caps opening up the possibility of upward revisions to earnings in coming weeks, which should be supportive of further upside to equities. We see lending rates in the economy still remaining somewhat sticky, and funding costs are likely to decline further over the next couple of quarters. We believe that markets are now discounting the likelihood of the presidential election being completed in a single round (i.e. a simple majority) and if the elections were to go to a second round run-off - it may prompt a corrective move.
Recommendations
Our preferred stock among banks has been Bank Rakyat, BRI’s 1Q results stood out among the banks, addressing several recent concerns, as we see it as the one of the main channels for stimulus initiatives later in the year. We believe that Astra International is well positioned for investors looking to play an eventual recovery, and possibly offers the possibility of PE expansion during a recovery. We recommend Indofood as a potential beneficiary from consumer purchasing power and prospects could receive a boost from the recovery underway in palm oil prices. We have recently downgraded Unilever Indonesia to an underweight, believing that its strengths are well captured in the price and as defensives rotate out of fashion, it is likely to underperform.
Minggu, 24 Mei 2009
Danareksa Telekomunikasi Indonesia (TLKM IJ, Rp7,400 BUY) Still growing
Still Growing
TP raised to Rp8,350
We have raised our target price to Rp8,350, offering 17.5% potential upside from the current share price. Our upgrade reflects the following: 1) the tax incentive obtained from 40% plus free float, 2) healthy subscriber growth in 1Q09, and 3) the end of last year’s price war which makes Telkom’s business model more sustainable. Note that Telkom is maintaining its plans to spend capex of US$1.6bn while the other players are tending to reduce capex because of the crowded market. Being the leader in the industry and having strong operating cash flow should help the company to maintain its preeminent position we believe.
End of the price war
Since the big three operators decided to declare a truce and end last year’s price war, there has been less advertising that promotes lower tariffs. This is good news as the price war had definitely put profitability margins under pressure. The operators have now tweaked their pricing in an effort to boost their revenues per minute (RPM). Telkomsel, for instance, has reduced bonuses and changed its pricing structure within the four time bands to boost its RPM. This shall help increase the company’s profitability and generate better cash flow.
The only growing operator
Telkomsel was the only operator to report positive net additions in 1Q09. In this period, the company added 6.8mn subscribers to increase its subscriber base to 72.1mn in total. In contrast, both Indosat and XL reported negative net additions (mainly because these operators refrained from offering special offers on starter packs, a practice which had previously helped to get new subscribers to sign up). Telkomsel, as the market leader and with a strong position out of Java, has not been hit by this phenomenon.
Enjoying tax benefits
Telkom will enjoy tax incentives in the coming years as the company is eligible for a 500bps cut in its income tax rate from the current level of 28% in FY08. Telkom qualifies for the tax incentive as its free float has reached over 40% with its shareholders numbering more than 300 in total. Thus, according to the guidance provided by the company, we lower our income tax assumption from 30% to 23%.
Earnings revision
We have altered our earnings estimates - but with minimal impact on the bottom line. The 1Q09 result was slightly weaker than expectations, especially in regard to the revenues. Nonetheless, we think that the RPM has now reached its bottom. There is no significant change at the bottom line from the weaker revenues because of the positive impact of the previously mentioned tax incentive.
TP raised to Rp8,350
We have raised our target price to Rp8,350, offering 17.5% potential upside from the current share price. Our upgrade reflects the following: 1) the tax incentive obtained from 40% plus free float, 2) healthy subscriber growth in 1Q09, and 3) the end of last year’s price war which makes Telkom’s business model more sustainable. Note that Telkom is maintaining its plans to spend capex of US$1.6bn while the other players are tending to reduce capex because of the crowded market. Being the leader in the industry and having strong operating cash flow should help the company to maintain its preeminent position we believe.
End of the price war
Since the big three operators decided to declare a truce and end last year’s price war, there has been less advertising that promotes lower tariffs. This is good news as the price war had definitely put profitability margins under pressure. The operators have now tweaked their pricing in an effort to boost their revenues per minute (RPM). Telkomsel, for instance, has reduced bonuses and changed its pricing structure within the four time bands to boost its RPM. This shall help increase the company’s profitability and generate better cash flow.
The only growing operator
Telkomsel was the only operator to report positive net additions in 1Q09. In this period, the company added 6.8mn subscribers to increase its subscriber base to 72.1mn in total. In contrast, both Indosat and XL reported negative net additions (mainly because these operators refrained from offering special offers on starter packs, a practice which had previously helped to get new subscribers to sign up). Telkomsel, as the market leader and with a strong position out of Java, has not been hit by this phenomenon.
Enjoying tax benefits
Telkom will enjoy tax incentives in the coming years as the company is eligible for a 500bps cut in its income tax rate from the current level of 28% in FY08. Telkom qualifies for the tax incentive as its free float has reached over 40% with its shareholders numbering more than 300 in total. Thus, according to the guidance provided by the company, we lower our income tax assumption from 30% to 23%.
Earnings revision
We have altered our earnings estimates - but with minimal impact on the bottom line. The 1Q09 result was slightly weaker than expectations, especially in regard to the revenues. Nonetheless, we think that the RPM has now reached its bottom. There is no significant change at the bottom line from the weaker revenues because of the positive impact of the previously mentioned tax incentive.
Macquarie Bumi Resources: FY09 EPS upgrade, sooner or later
There is a set perception in the marketplace that Bumi’s shares have traded up based on “non-fundamental reasons”. Is it really? Listening-in to the management call yesterday (1Q09 results review), I came away with the impression that at some point this year, sell-side analysts will need to recognize that their FY09 (and FY10) EPS estimates are too low. Of the 13 foreign brokers covering the stock, there are 8 Sells, 2 Neutrals, 1 Suspended coverage, 1 Trading-buy, and 1 Buy. I think trading momentum behind the stock may remain positive in the near term.
Consensus is currently looking for US$456mn NPAT for FY09 (P/E of 8.4x) and US$400mn for FY10 (P/E of 11.1x). Adam Worthington & Albert Saputro (Macq analysts) are looking for US$417mn NPAT for FY09 (P/E of 9.3x) and US$200mn for FY10 (P/E of 19.3x). Some sensitivity analysis to Bumi’s FY09 forecast suggests that FY09 NPAT may come in at US$600mn or more (P/E of 6.4x), 31% above consensus and 43% above Macq. The US$600+mn NPAT assumes: (1) 57mn tons output, (2) US$64/ton ASP, (3) US$29/ton cash cost, (4) 25% effective tax rate.
Where are the surprise factors?
1. Cash cost – 1Q09 cash cost came in at US$29/ton, lower than Macq full year forecast assumption of around US$30/ton. This is despite the much higher overburden removal activity (147 Mbcm in 1Q09 vs. 119 Mbcm in 1Q08), or a strip ratio of 13x vs. Macq assumption of around 9x. Bumi focuses more on overburden due to the unusually heavy rainfall, the strip ratio should normalize through the year, resulting in a down-trending cash cost profile.
2. Tax rate – 1Q09 effective tax rate came in at 14%, vs. Macq assumption of 45%. Management said Bumi has used up almost all of its historical tax credits, but guides for an effective tax rate of around 30%. Since the positive tax surprise has been recurring for the last two years, I increasingly think there is something permanent about Bumi’s tax saving structure, perhaps due to its complex corporate structure involving foreign and domestic entities.
Consensus is currently looking for US$456mn NPAT for FY09 (P/E of 8.4x) and US$400mn for FY10 (P/E of 11.1x). Adam Worthington & Albert Saputro (Macq analysts) are looking for US$417mn NPAT for FY09 (P/E of 9.3x) and US$200mn for FY10 (P/E of 19.3x). Some sensitivity analysis to Bumi’s FY09 forecast suggests that FY09 NPAT may come in at US$600mn or more (P/E of 6.4x), 31% above consensus and 43% above Macq. The US$600+mn NPAT assumes: (1) 57mn tons output, (2) US$64/ton ASP, (3) US$29/ton cash cost, (4) 25% effective tax rate.
Where are the surprise factors?
1. Cash cost – 1Q09 cash cost came in at US$29/ton, lower than Macq full year forecast assumption of around US$30/ton. This is despite the much higher overburden removal activity (147 Mbcm in 1Q09 vs. 119 Mbcm in 1Q08), or a strip ratio of 13x vs. Macq assumption of around 9x. Bumi focuses more on overburden due to the unusually heavy rainfall, the strip ratio should normalize through the year, resulting in a down-trending cash cost profile.
2. Tax rate – 1Q09 effective tax rate came in at 14%, vs. Macq assumption of 45%. Management said Bumi has used up almost all of its historical tax credits, but guides for an effective tax rate of around 30%. Since the positive tax surprise has been recurring for the last two years, I increasingly think there is something permanent about Bumi’s tax saving structure, perhaps due to its complex corporate structure involving foreign and domestic entities.
CLSA ITMG, high beta, reliable miner, and credible CG
Indo Tambangraya (ITM IJ) is one of the companies attending our CLSA Corp Access Forum in Singapore (20-22 May 09) and they will have a workshop session today. ITMG is Olie’s favorite stock in the resource sector. In fact, ITMG is the only BUY in his coverage universe. This stock is also my entry in our internal stock picking competition for 2Q09.
ITMG is the 4th biggest coal company in Indonesia, producing 17.7mn tonnes in 2008. It has sizeable resources totaling 1.7bn tonnes, and decent reserves of 312mt. The company has built a reputation as a reliable supplier to customers and as a company with credible CG.
ITMG’s earnings are highly sensitive to the price movements of thermal coal. Export portion and cost structure are high, hence the operating leverage (and btw, the other coal name that is highly sensitive to thermal coal price is BUMI).
ITMG is the 4th biggest coal company in Indonesia, producing 17.7mn tonnes in 2008. It has sizeable resources totaling 1.7bn tonnes, and decent reserves of 312mt. The company has built a reputation as a reliable supplier to customers and as a company with credible CG.
ITMG’s earnings are highly sensitive to the price movements of thermal coal. Export portion and cost structure are high, hence the operating leverage (and btw, the other coal name that is highly sensitive to thermal coal price is BUMI).
CIMB Indocement Company update - Never looked this alluring
(INTP IJ / INTP.JK, OUTPERFORM - Maintained, Rp6,300 - Tgt. Rp7,000, Construction and Materials)
We maintain Outperform and target price of Rp7,000 (based on US$125 EV/tonne, mid-cycle valuations). We like Indocement not only for its fundamental strength but potential M&As (acquisition target). Heidelberg is now likely to sell its 15% stake. Meanwhile, we would not be surprised if we see more dividends in the near term and Heidelberg ceases control eventually, which could fuel a re-rating closer to the replacement value of US$150 EV/tonne (implying a share price of Rp8,250).
We maintain Outperform and target price of Rp7,000 (based on US$125 EV/tonne, mid-cycle valuations). We like Indocement not only for its fundamental strength but potential M&As (acquisition target). Heidelberg is now likely to sell its 15% stake. Meanwhile, we would not be surprised if we see more dividends in the near term and Heidelberg ceases control eventually, which could fuel a re-rating closer to the replacement value of US$150 EV/tonne (implying a share price of Rp8,250).
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