After a disappointing 2015, investors will be hoping for an earnings recovery although we think strong signs are likely in 2H16 post cut in BI rate. Consensus market EPS forecasts continue to trend down, especially after a lackluster 3Q15 reporting season. Thus we believe less downside risks to consensus market EPS forecast going forward. We forecast 2016-2017 market EPS growth of11%-12%, based on 72 stocks under our coverage that make up 71% of JCI market capitalization.
Economic Growth in Indonesia as per 3Q15 has increased to 4.73% from 2Q15 for 4.67% from 4.71%. Realization until 3Q15 is still far from macroeconomic target in RAPBN-P which reached 5.7%. Inflation rate is still high and above govt target. Until October 2015, national inflation reached 6.25% while inflation target reached 5%.
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December inflation spiked to 0.96% MoM (November: 0.21% MoM), but in term of annual basis it was down to 3.35% (November: 4.89% YoY). This was 2015’s lowest YoY level but well above our estimate as well as market expectations. Higher inflation occurred in most all of the index components except for clothing, with a seasonal surge in staple food prices were a main CPI driver (up 3.2% MoM from November’s level at 0.33% MoM).
Indonesia’s domestic shipping industry has a bright future going forward under the cabotage principle and the liberalization of port management. The Indonesian shipping law introduced in 2008 (and the earlier Inpres 5/2005) includes a very significant strengthening of cabotage requirements, formally requiring that all foreign-flag vessels operating in the Indonesian domestic trades be replaced by Indonesian-flag vessels and use Indonesian crews.
With low air travel penetration rate coupled with resilient economic growth, we believe Indonesia’s airline passenger to continue to pick up as domestic air travel for leisure as well as business still has more room to grow. Based on the Transportation Ministry data, Indonesia has a low airline penetration rate of only 42%, significantly well below other countries. This is the foundation of GIAA’s strong growth in the past and going forward.
Despite the reduced investment and activity, SKK Migas estimated that Indonesia total oil production would touch 820,000 bopd, higher than the 825,000 bopd projected in the state budget. Additional production from Banyu Urip field at Cepu Block, which is expected to reach peak production later this year, will be the main driver of the higher output figure.
The downdraft in El-Nino reflects our wider concern about crop failure in South East Asia. Based on our latest ground checking to farmers in South Sulawesi, monthly avg. corn price in South Sulawesi has increased by approx. 15% over the last three months from Rp3,200/kg to Rp3,700/kg. However, we do not expect lack of supply as the corn export sales volume during 1H15 to jumped 3x-4x compared to last year at same period.
The media market experienced a general slowdown in advertising expenditure starting in the second half of 2014 while continuing economic headwinds weighed down the FMCG sector in 1H15. Growth in ad spending in 1H15 was the lowest in the last decade. This is compared to growth in advertising spending of 12% in 1H14, 25% in 1H13, and 24% in 1H12.
Indonesia’s healthcare spending is currently way behind the average for both developed countries and ASEAN countries as the system is still unable to provide adequate service for its population which more than 250 mn. Healthcare expenditure in Indonesia stays at 3.0% of GDP lower compared to the ASEAN countries and developed markets which are 4.0% and 12.4% to GDP respectively.
After facing a shaky growth last year due to presidential election, during this year, property players is facing a number of challenges which are coming from changed in luxury property tax regulation, Rupiah depreciated, and slowing down on economy. Despite the noise from the property task has receded and government has relaxed the LTV ratio; demand for property is unlikely to recover.
The number of cigarettes consumer in Indonesia continues to increase from year to year. According to the latest survey, Indonesians consume 10 cigarettes a day on average, making Indonesia the world’s third-largest cigarettes consumer after China and India. It was driven by growing middle-income class that leads to greater affordability to boost their consumption and also attractive Indonesia’s demographic, given its vast population with over 250 mn people.
Positive catalyst for CPO may come from biodiesel, which Pertamina has agreed to buy 339 million liters of CPO from distributor AKR Corporindo between Aug. 17 and Oct. 31 and another 426 mn liters for the period through the rest of the year. We believe the contract should carry over for next year. Government will impose fine (penalty) of Rp 6,000/liter for Pertamina and AKR Corporindo if biodiesel quota missed, according to Energy and Resources Minister.
Major cut of stripping ratio, cost efficiency, as well as limitation for high calorific coal production become the main agenda for coal sector this year. Land procurement for power plant is relatively slow. However, cash cost in USD tends to decline given depreciating rupiah, which brings bargaining power for coal miners to make another renegotiation with the contractors.
2016 state budget shows number of listed companies that will receive government capital injection namely WIKA (Rp 4 tn), KRAS (Rp 2.46 tn), PTPP (Rp 2 tn) and JSMR (Rp 1.25 tn). Investors will have to contend with issue next year but as with WSKT earlier this year, this may simply offer confidence to the view that they will be taking on more business on stronger balance sheets, enabling both WIKA and PTPP to leverage its higher equity next year.
We expect small increase in national heavy equipment sales to 8,141 units for 2016 (+6% YoY) driven by higher construction machinery volume (+16% YoY to 2,849 units) on growing demand from infrastructure project. We expect share of heavy equipment sales to construction sector to expand from 32% in 2015F to 35% in 2016F. SOE contractors currently rent most of their heavy equipment from third parties.
Indonesia’s new car and motorcycle sales were reported by the industry association down by 19% YoY to 672k units and 21% YoY to 4.2 mn units, in the first eight months of 2015. This resulted from slower economic growth, depressed commodity markets, weaker Rupiah, and the lack of meaningful new product launches.
We believe that modern retail industry in Indonesia is still underserved. This is also supported by the fact that modern retail sales has only contributed around 16% to total retail sales in Indonesia, much lower than its neighbors (vs. China 60%, Singapore 70%).
We are expecting for more government stimulus next year, targeting to bring down inflation as well as improvement in consumers’ purchasing power such as lower fuel price and electricity subsidies, helping to regain the consumers’ confidence back. Another plan is the disbursement of the direct cash assistance for households whose income is less than average.
We still bullish on cement sector as we like the sector’s recovery stories, both on demand and margin outlook in 2016. Despite we expect new players will create more challenging competition in 2016. Despite we expect new players will create more challenging competition in 2016, we still confident that demand will remain structurally strong given the new government’s infrastructure development initiatives, huge backlog on national housing sector and low cement consumption per capita.
Indonesian government planned a construction of 1,000 km of toll roads. This addition consists of Trans Sumatra, Trans Java, Samarinda – Balikpapan Toll Road and Manado Bitung Toll Road. Currently, the total length of operating toll road in Indonesia has reached 820.2 km.
Consolidation among telco players leads to more rational competition among survivors, with ARPU tends to increase. Telkomsel has raised its data package recently and we expect the pther players to follow. Meanwhile, voice segment will remain as value buffer despite its benign growth.
Banking industry loan growth in Indonesia has been slowing down since 2014 until today. Apparently it was caused by the loan growth which fell down to 11.5% YoY from 21.8% YoY in 2013.
Global economic growth in 2016 projected at 3.8%. One of its main cause is the economy of United States, which roughly increased by 3% and India at 7.5%. China is expected to have a decreasing growth in its economy by 0.5% leaning towards 6.3%.