17 companies out of 73 companies under our coverage universe have released their FY16 results by end of February. 36% of companies beat estimates, 24% fell short and the rest 40% were in line (counted as companies reporting net income within +/-5% of our estimates). We saw some of the major non-operational items affected the accuracy of our forecast that were mainly attributable to the: (i) big tax benefit by SMGR, ii) the absence of impairment loss by UNTR, iii) higher tax rate of 63% by INCO and iv) a significant turnaround into forex gain by AALI and JPFA.
National cigarettes sales volume growth reached its slowest pace in 2015 where sales volume in 2015 was on the same level as in 2014. However, sales volume has started to grow in 2016 where as of 1H16 sales volume grew by 0.3% in 1H16. On QoQ basis in 2Q16, sales volume accelerated by 13.4% QoQ and 6.4% YoY. We can somewhat attribute the volume rebound to better economic growth in 2016 in the mid of lower inflation (thus better purchasing power) and reasonable excise tax increase in 2016 by 11.2% (about the same level as nominal GDP growth). In 2017, we expect cigarettes sales volume growth to rebound by 2% with better purchasing power.
High grade coal (coking coal) demand will continue to outpace supply in 2017, ending two years of oversupply condition. Demand from China, India and Japan steel markets remains buoyant, but supply is expected to decrease due to China’s coal production cut since mid-2016, creating a global coking coal deficit. Global coking coal price starts to rally to USD130/Mt in June 2016 and remains above USD160/Mt since September.
We see Indonesia GDP growth accelerating from 5.1% in 2016F to 5.3% in 2017F driven mainly by higher consumption. We believe low inflation and interest rate environment coupled with rising commodity prices should help boost purchasing power and enable a further consumption recovery. 2Q16 saw private consumption improve to 5.04% after registering sub-5% growth since 2Q15. We also expect higher investment driven by a robust consumption growth outlook, better political stability, recovery in exports, and likely further sovereign credit rating upgrades on more realistic budget which can improve the policy to be more effective and predictable.
In June 2016, loans of banking industry grew by 8.8% YoY while deposit only grew by 3.6% YoY during the same period, both were considerably slower than at the end of 2015. The slowing down of loans and deposit growth is a structural trend that has begun since 2011. Nevertheless, a trend must stop somewhere and we expect that loans growth could start to accelerate in 2017 on the back of higher economic growth and central’s bank consistent expansive monetary policy. BI expects industry loans to grow by 11% YoY in 2017, and we also believe that loans to grow by 11.0% YoY in 2017.
As recent damaging El Nino phenomenon has come to an end, we expect both palm oil production in Indonesia and Malaysia to gradually recover towards the end of this year before entering low-crop season in 1H16. We might see Indonesia’s palm oil output to increase to 33 mn ton next year, modestly higher compared to this year’s expectation of 31 mn ton as crop resumes its yearly growth momentum.
Despite of the government efforts to implement some measures to boost demand, the property sector has not shown an improvement yet in 2016. Softer demand still continues. Marketing sales achievement has shown little improvement from last year’s even worse performance. We believe that these are mostly triggered by the vertical development segment, while residential segment remain stable.
Incorporating the sluggish global economic recovery and low commodity prices, the government set lower state revenues of Rp 1,738 tn in 2017 or 2.7% lower than the target in the revised 2016 budget. However, total spending for infrastructure is budgeted at Rp337 tn still grow by 11% YoY. We believe 2016 would be another significant year for the construction sector since that most infrastructure projects are expected to forge ahead since we need infrastructure development to go on and spur future growth.
Indonesia Consumer Confidence Index has rebounded strongly since late 2015, and stood at 116.8 as of October 2016. The upward pattern of CCI is quite consistent and clear as economic growth in 2016 has been recovered from weakness in 2015 along with controlled inflation, thus, lifting purchasing power of Indonesians. We expect that CCI will remain on an elevated level in 2017, pinned by stronger GDP growth and still controlled inflation. Stronger purchasing power in 2017 is a support for consumer products volume growth in 2017. Relatively high consumer confidence and purchasing power also means that consumer companies can pass rising input costs to consumer with ease.
Indonesian equities performed impressively in 10M16 (+18% and +25% in USD term) and we expect a repeat in 2017, as underlying fundamentals continue to support growth and a further re-rating
The upstream Oil & Gas (O&G) segment finds and produces crude oil and natural gas (NG). As a price taker, upstream O&G, also known as exploration and production (E&P), has direct exposure to oil price volatility and, to a certain extent, gas price volatility. During a downturn, E&P companies will look for ways to cut costs. After the steep decline in oil prices from the recent peak in Jun 14, we have seen an average capex cut of 15% by oil majors (ie BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell, Statoil and Total SA) and an average cut of 16% by national oil companies (eg CNOOC, Pertamina, Petrobas, Petronas, Petrochina) in 2015.
The Indonesian equity market was very bullish in August (month-to-date 25 Aug) rising 4.6% as foreign fund continued flowing in. However, our model portfolio was only inched up by 0.3% in July, underperforming the JCI significantly, dragged by worse-than-expected return in EXCL (-17%), JSMR (-4.2%) and GGRM (-1.0%).
In line with our estimate but in contrast to the market expectations which believed another series of rate cut by 25 bps, Bank Indonesia has maintained the BI (Bank Indonesia) rate at 6.50% as well as its lending facility rate at 7.00% and its deposit facility rate at 4.50%. We see that short-term macroeconomic stability over external uncertainties should become the central bank top priority in the last BOG meeting.
The UK referendum vote to leave the EU has understandably prompted a significant market reaction. We expect overall impact of the Brexit to be insignificant due to Indonesia's limited exposure to the UK. In general, the impact would be indirect and may come from a prolonged global slowdown.
A surprise indication from the U.S. Federal Reserve that it may raise interest rates at its next policy meeting in June weighed on global stock markets in May. The intensifying debate of a US Fed's June hike has also been dampening global investors' appetite for Indonesian stocks and Rupiah.
May total imports bounced back by 2.98% MoM (-4.12% YoY) to USD11.1 bn, mainly on the back of higher demand for imported consumption goods as Indonesia started to enter cyclical trend on the advent of June’s fasting month. Note that import for consumption and intermediary goods surged 15.7% MoM and 3.86% MoM respectively in May.
May CPI surge to 0.24% MoM (April: -0.45% MoM) on the back of rising prices for almost all components during the advent of June’s fasting month. The CPI reading was lower than our estimate but relatively in line compared to consensus projection. We note that in term of MoM CPI level during the advent of fasting month, May 2016 inflation was the lowest level for the past 4 years.
Due to lower-than-expected 1Q16 GDP reading, Bank Indonesia has revised down its 2016 full-year economic growth target to 5.0%-5.4% from previous estimate of 5.2%-5.6%. Nevertheless, the central bank expects economic growth to pick up in the next quarters, exceeding 1Q16’s level powered by government capital spending disbursement.
Higher compared to our estimate but relatively better than prior quarter’s level, the 1Q16 current account deficit (CAD) narrowed to USD4.7 bn (2.1% of GDP; USD5.1 bn in 4Q15) which was primarily led by larger non-oil and gas trade surplus. Moreover, slower-than-expected government capital expenditure disbursement in the first quarter of 2016 caused a disappointing import demand, dragging down 1Q16 non-oil & gas import to -7.0% QoQ.
The statistics bureau (BPS) announced on Wednesday that Indonesia’s economy expanded an annual 4.92% in 1Q16, below the economist median expectation of 5.06%. Less contribution from direct investment and government spending realization were the major drags on economy growth but real private consumption managed increased to 4.94% YoY (4Q15: 4.92%).
It is worth spotting that lower YoY level was due to less contribution from direct investment and government spending realization. Furthermore, relatively in line with our estimate, a slower-than-expected government capital expenditure as well as a modest direct investment realization from domestic and foreign investors paved the way to slightly deceleration in gross capital formation to 5.57% YoY (ours: 5.34%, 4Q15: 6.90%).
April CPI turned back to the deflation territory, plunging to -0.45% MoM (March: 0.19% MoM), dropping to 3.60% YoY, beating the street expectation but relatively in line compared to our estimates. We note that April MoM was the lowest level since March 2008(base = 2012) while YoY level down to its 4-month low at 3.6%. Overall, April CPI brought YTD figure to book a relatively subdued inflation of 0.96%.
In line with our and market expectations, Bank Indonesia has maintained the BI (Bank Indonesia) rate at 6.75% as well as its lending facility rate at 7.25% and its deposit facility rate at 4.75%. This is also in line with the central bank’s previous statement which would prioritize the strengthening of term structure before deciding to further lower benchmark rate.
The change from BI rate as benchmark to RR rate has certain potential direct and indirect consequences for banks. The indirect consequence relates to how effective BI monetary policy is after the change of benchmark to RR rate compares to BI rate as the benchmark. Should RR rate adoption as benchmark renders smoother transmission of monetary policy, this is beneficial for banks as BI can expand can lower market interest rate faster, thus enabling banks to trim cost of funds.
We foresee the outlook remain challenging for cement sector mainly due to oversupply condition. Hence we maintain our Neutral rating on the sector with preference of market leader since they could survive in tough business landscape. We maintain our BUY rating for SMGR with TP of Rp12,000 and HOLD rating for INTP with TP of Rp21,000.