Uncertainty over the duration and severity of Covid-19 impact to global economy
Global stock markets have had their worst week since the depths of the 2008 global financial crisis (GFC), reflecting the growing fear over the economic catastrophe due to the rapid global spread of the coronavirus (formally known as Covid-19) . WHO has warned corona virus outbreak could soon reach every country in the world. For now, global investors seem to be expecting things to get worse. The spread of Covid-19 is unsettling global supply chains, sapping sales of some products. A big concern also is that the virus will force consumers to stay home from work, avoiding stores, restaurants or other businesses and confidence will continue to deteriorate. So, Covid-19 is not only affected the supply side but also the demand side. In that case, a global economic contraction could become inevitable.
Negative domestic macro headwind
The fact that global economy is likely going to drop sharply 1Q19 would mean that Indonesia will not escape the impact of that. The earlier-than-expected interest cut by Bank Indonesia to 4.75% in February comes as a pre-emptive measure to support economic growth. The government has also announced a Rp10.3 tn (USD743 mn) stimulus package that is expected to boost consumer spending (of total, Rp4.6 tn is distributed to the 15.2 mn beneficiaries) and reinvigorate Indonesia’s tourism industry. As the economic impact of the Covid-19 looks more severe than originally expected, our Economist is reducing his 2020 GDP growth forecast from 5.1% to 4.8% and introduce 2021 GDP forecast of 5.1%. We see stress is starting to show in the Rupiah and Indo government bond where Rupiah revert to above Rp14,000/USD and the 10-yr government bond yield rose from this year’ low of 6.5% to 7.1%. As at time of writing, Indonesia has just confirmed its first two cases of Covid-19. We actually take no view on the future development of the Covid-19, but we expect the spread to be largely contained by end 1H20.
Risk/reward for the market skewed to the downside
The JCI has corrected 15% Ytd and 16% from the 14 January high and the forward valuation has reduced from 15.1x to 12.7x due to risk-on move since mid-January. Historically, correction (between 10% and 30%) lasted 5 month on average the GFC 2008 and 2015 with average trough earnings multiple valuation of 10.8x. As we now use top-down approach, our new GDP growth forecasts translates to lower 2020-21F index EPS integer of 416-453 (from previously of 420-462), translating to 8.4%-8.9% growth Therefore, using average GFC trough valuation of 10.8x we could see the JCI hit its low point of 4,900 in 1H20 which is our worst case scenario. A very rapid rebound by 2H20 could follow if there is end on of this outbreak in sight. Foreign investors have pulled USD339 mn from Indonesia equities so far this year.
So far, 2019 results mostly in-line but more downgrades for 2020-21 profit estimates
2019 earnings season is kicked off in February with only 16 companies out 66 the companies under our coverage reporting actual results so far. On net profit front, most of these companies have reported in-line results (60%) while 13% reported earnings below estimates and 27% exceeded estimates. Post results , we saw negative earnings revisions of 3.1-3.4% for 2020-21F hence the target prices, suggesting more prudent choice related to Covid-19 risk assessment and lower corporate earnings guidance as well as housekeeping purposes. The earnings downgrades are mainly coming from (i) Banking, (ii) Telco as well as (iii) mining-related sectors while the earnings upgrades were seen only at plantation sector.
YE 2020 JCI target cut to 6,200
Subsequent to our downward market EPS while we are now using 12-yr historical data, incorporating the 2008 and 2015 GFC valuations in our index calculation. We cut our year-end 2020 JCI target from 6,930 from 6,200 (+16% upside potential from current price), which is based on forward PER of 13.7x (-1.5stdev of mean). Therefore, we remain Overweight Indonesia. We could see sharp index correction could continue during 1H20 based on the above mentioned worst-scenario , suggesting investor to have patient in the short-tem, and expect a sharp rebound in 2H20. Upside risks to our call is higher-than-expected 1Q20 results as we saw banks our under coverage posting 17% YoY earnings growth supported by 12% growth in NII in 1M20, while banks earnings accounted for around 35% of our earnings universe. Our top picks remain BMRI, BBNI, INDF, TLKM, TBIG, WIKA, SMGR, MDKA and BULL (Exh. 6). We also believe some of stocks with potential high-dividend yield (Exh. 5) are worth considering.