Dbsv - Indonesia Strategy

8/8/2019 Dbsv - Indonesia Strategy

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Refer to important disclosures at the end of this reported: JS / sa : TW

Key IndicesCurrent % Chg

JCI 2,913.7 0.7%

LQ45 566.1 0.6%

Industry 312.0 1.1%

Consumer 959.0 -0.8%

Rp/US$ 9,083 -0.6%

Daily Vol (m shrs) 3,187.2

Daily Turnover (Rpbn) 3,026.8

Daily Turnover (US$m) 333.2Source: BEI

Market Key Data(%) EPS Gth Div Yield2009A 27.6 2.3

2010F 16.7 2.9

2011F 17.7 3.3

(x) PE EV/EBITDA2009F 17.3 6.6

2010F 13.4 5.5

2011F 11.4 4.7Source: DBSVI

Stock Picks Large Cap Price (Rp) Target29-Jun Price

Bank Mandiri 5,900 7,000

Bank Rakyat Indo 9,150 11,100

Perusahaan Gas 3,825 4,800

Adaro Energy 1,970 2,500Indofood Sukses 4,050 4,750

XL Axiata 4,050 5,200Source: BEI, DBSVI

Stock Picks Small Cap Price (Rp) Target29-Jun Price

Sampoerna Agro 2,300 3,275

Source: BEI, DBSVI

Opportunity amid volatility

Benchmark bond yield has plunged to a 13-yearlow; potential for sovereign ratings upgradebodes well for equities

Stronger Asian currencies due to RMBrevaluation should help Asian equities

Market may re-rate to 15.5x 2011F PER, > 20%upside potential. Near term weakness is abuying opportunity

Lower risk-free rate presents a solid case for re-rating.Thebenchmark 10-year bond yield (proxy for risk-free rate) stands at8.1%, having declined 40 basis points over the last one-monthand 190 basis points YTD. The immediate catalyst was Moodysrevision in the outlook for Indonesias sovereign debt to positivefrom stable on June 21. Government targets furtherimprovement in Indonesias sovereign rating, with an objectiveof securing investment grade rating in 2011, which DBS GroupResearch believes is a feasible target. Our current discount ratesare based on a 9.5% risk-free rate. Incorporating an 8.5% risk

free rate, we can justify 15.5x 2011F PER instead of 14x,translating into a target of 4800 for MSCI Indonesia. A 15.5xPER with 8.5% risk-free rate is conservative compared to the2007 peak of 15.6x PER with a 10% risk-free rate.

Stronger Asian currencies are associated with market

outperformance.While the pace of RMB appreciation isuncertain, Chinas focus to shift reliance from exports to

domestic consumption is quite certain. A weaker USD or

stronger Asian currencies were also associated with Asian market

outperformance in the past. During the RMB managed float

regime in 2005-08, Indonesia (JCI +90%) outperformed (STI

+30%, KLCI +20%) Moreover, the Indonesian economy is

largely insulated from the European crisis, with domestic

demand accounting for 90% of real GDP.

Ride on the domestic demand theme. Banks have

outperformed in the last one-month driven by expectations of

loan growth exceeding 20%. Bank Mandiri is our top pick in the

sector. We like Indofood in the consumer sector and XL among

telcos. We prefer Adaro as a proxy to the Indonesian coal sector.

Key risk to our view.A rise of over 200bp in the 10-year bondyield precedes major market correction historically. Bond yield

above 10% could indicate potential market correction.

AnalystsSachin Mittal +65 6398 [email protected]

Indonesia Research Team

Recipients of this report, received from DBS Vickers Research (Singapore)Pte Ltd (DBSVR), are to contact DBSVR at +65 6398 7950 in respect ofany matters arising from or in connection with this report.

DBS Group Research . Equity 02 July 2010

Regional Market Focus

Indonesia Strategy


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10-year bond yield as a leading indicatorAs seen in Chart 1, the equities market corrections in Indonesiain 2005 and 2008 were well preceded by significant rise (over

200 basis points) in the 10-year bond yield, reaffirming our

belief that 10-year bond-yield is a reliable leading indicator.

Similarly the PER re-rating in the past has been preceded by

declining bond yields. Mathematically, we found a high

correlation of -0.78x between PER and 10-year bond yields

since 2005. Indonesia is amidst a sovereign ratings upgrade

cycle, which should help lower yields and lead to higher PERs in

our view.

More rating upgrades waiting in the queue. Last week,Moody Investor Service raised the outlook on Indonesias

local and foreign-currency debt to positive from stable,

driving 10-year bond yields to a record low of 8%. In

September 2009, Moody had raised the country's sovereign

rating to Ba2 with a stable outlook, which is now revised toBa2 with a positive outlook. Ba2 is two notches below

investment grade. The Moody's move comes after Standard

& Poor's Ratings Services in March 2010 raised Indonesia's

ratings by one notch to BB with a positive outlook. A BB

rating is two notches below investment grade. Separately,

Fitch Ratings in January 2010 had raised the country's

creditworthiness by one notch to BB+ with a stable outlook,

putting it only one step below investment grade. Given

Indonesian governments intent to secure investment grade

rating in 2011, we expect continuity in the fiscal and

monetary policies. We believe that Indonesia is on track to

achieve investment grade rating and the key question is

whether Indonesia can secure the rating in 2011 or 2012.

Chart 1: 10-year bond yields as a leading indicator of PER re-rating

Source:Datastream, DBS Vickers

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MSCI Indo PE (LHS) 10 yr govt bond (RHS)

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9.1x PER

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8.8% yield31 May 07

12.7x PER

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15.6x PER

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10.0% yield

31 Dec 07 8.0% yield30 Jun 10

12.8x PER

30 Jun 10

10% yield

31 Jan 05

9.6x PER

30 Jan 05


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Implications of a lower risk-free rateAs seen in chart 1, the benchmark 10-year bond yield (proxyfor risk-free rate) stands at an all-time low of 8%, having

declined 50 basis points over the last one-month and 200 basis

points year-to-date. Sovereign ratings upgrades have started to

gather momentum as Indonesia has been upgraded by

Moodys, Fitch and S&P over the last six months. We believe

that Indonesia could return to investment grade (for the first

time since 1997) over a one-to-two year timeframe.

Our current discount rates are based on a 9.5% risk-free rate.

Incorporating an 8.5% risk-free rate, we can justify 10-12%

higher valuation of 15.5x 2011 PER for MSCI Indonesia, instead

of 14x. A 15.5x PER with 8.5% risk-free rate would still beconservative compared to the 2007 peak of 15.6x 12 month

PER with a 10% risk-free rate.

Historical correlation between PER and 10-year bond yieldsWe saw high correlation of 0.78 between 12-month PER

versus 10-year bond yields since 2005. Below is the scatter

graph between the variables. This helped us to arrive at an

approximate relationship between the two variables.

Chart 2: Historical relationship between PER and bond yield

Source: DBS Vickers

Source: DBS Vickers

Table 1: Sensitivity based on historical relationship10-year Bond Yield 12-month PER

7.0% 16.4x7.5% 15.8x

8.0% 15.3x

8.5% 14.8x

9.0% 14.2x

9.5% 13.7x

10.0% 13.1x

Source: DBS Vickers

During 2008-2009, equity premiums had gone up substantially

due to the global financial crisis, leading to much lower PERthan suggested by the 10-year bond yields. We do not expect

any major change in risk premium in 2010. On a bottom-up

basis, lowering the risk-free rate to 8.5% from 9.5%, we

estimate 12% higher valuation of 15.5x PER than 14x as

suggested earlier by us. We would turn cautious on the market

only if bond yields rise above 10%, indicating liquidity issues.

y = -0.9753x + 22.612

R2 = 0.6119

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Implications of RMB revaluationChina surprised markets last week with its announcement thatthat it may be about to end its two-year-old peg to the dollar

to allow greater currency flexibility. While the pace of RMB

appreciation is uncertain, Chinas focus to shift reliance from

exports to domestic consumption is quite certain, in our view.

We expect three key outcomes.

(a) Back in 2005 when the RMB revaluation first tookplace, RMB appreciated 19% in three years (about

6.0% a year). Based on past experience, market

expects RMB to rise by 3.0% by end of 2010,

implying an annualized rise of 6.0%. Our economist

believes that RMB appreciation may be slower, at less

than 2% by end of 2010, as China could be cautious

due to weak European demand.

(b) A weaker USD or stronger Asian currencies aretypically associated with Asian stock markets

outperformance. During the RMB managed float

regime in 2005-08, ASEAN stock markets delivered

strong returns, with Indonesia (JCI +90%)

outperforming (STI +30%, KLCI +20%)

(c) A stronger RMB means higher Chinese purchasingpower, which may lead to higher imports ofcommodities. This could be beneficial for the

Indonesian coal sector, with China as a key consumer,

although the magnitude of RMB appreciation is a key

uncertainty here.

Rupiah expected to strengthen graduallyDBS forecasts the USD/Rupiah exchange rate to be range

bound between 9000-9300 in 2010 before appreciating to

8700 by end -2011 and 8300 by end-2012.

Key risk to our view is foreign funds outflowGoing by the past experience in 2005 and 2008, equity

markets may not see a substantial correction, unless 10-year

bond yields rise by over 200 basis points, signaling major risk

aversion. Attractive interest rates spread between IDR and

USD bonds and bills make Indonesia an attractive destination

for carry trades. It also suggests that Indonesia equity market

could be subjected to external foreign factors such as Euro

zone crisis.

Chart 3:USD/IDR exchange rate over the last two years

Source: Bloomberg

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Domestic consumption continues to be strongReal GDP expanded 5.7% y-o-y in 1Q10, accelerating from

5.4% in 4Q09. Household consumption, the pillar of thecountry's economy, rose 3.9% y-o-y in 1Q10; investment

gained 7.9% and exports gained 19.6%. An 8.8% decline

in government spending, however, weighed on growth.

Central bank expects GDP growth in 2Q10 and 3Q10 to

expand at a faster pace as investment and consumption

gain momentum.

The Ministry of Finance (MoF) projected in May that

Indonesias budget deficit in 2011 may be 1.7% of GDP,

down from an expected 2.1% in 2010. MoF expects real

GDP growth of 5.5%-6.0% in 2010 and 6.2%-6.4% in

2011 with 5.3% inflation in 2010 and 4.9%-5.3% in 2011.All this is reasonable and not significantly different from DBS

Group Researchs projections for 2010 (deficit: 0.9%of GDP,

average real GDP: 5.5%YoY, average inflation: 4.7%YoY).

Moreover, the Indonesian economy is largely domestically

driven, with domestic demand accounting for 90% of real

GDP. Lastly, we continue to see the monetary policy outlook

as bond friendly. Bank Indonesias Deputy Governor Hartadi

Sarwono said in May 2010 that there is no urgency to raise

interest rates if the inflation rate hovers around 5-6%.

Chart 4: Quarterly GDP (YoY) on rising trend

Source: CEIC, DBS Group Research

Chart 5: High consumer confidence index of 110 in May 2010


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Chart 6: Motorcycle sales continues to be strong (Astra)

Source: CEIC, DBS Group ResearchChart 7: Car sales continue to be healthy (Astra)

Source: CEIC, DBS Group ResearchChart 8: Foreign reserves continue to increase (US$ bn) except for a blip in May 2010


Foreign reserves declined by about US$4bn in May, mainly

due to investors selling off short term debt instruments

(SBIs).At the end of 1Q10, there was US$6.9bn worth of SBIs

in the market, which should be less than US$3bn now after

the recent sell off.

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Regional ComparisonsTable 2- Indonesia is cheaper than India, Hong Kong and Singapore on FY11F PER basis

Source: Datastream, DBS Vickers

Table 3 Indonesian earnings less likely to decline in case of weakness in exports due to Euro zone crisis


Sector 1m 3m 6m 1m 3m 6mMSCI Korea -0.2 7.7 12.6 -0.2 4.4 7.8MSCI Hong Kong -0.7 0.2 6.5 -0.9 -1.6 0.5

MSCI Taiwan -1.0 8.0 19.2 -0.7 2.2 7.7

MSCI Singapore -1.0 1.4 5.7 -0.8 1.9 5.8

MSCI India -0.6 0.3 0.9 -0.5 1.2 2.7

MSCI China -1.2 0.1 -0.6 -0.8 -0.1 -0.1

MSCI Indonesia -0.5 1.0 3.8 0.1 2.4 5.0

MSCI Thailand 0.5 1.8 4.5 0.4 2.6 5.1

MSCI AC Asia-ex-Japan 2.1 2.6 7.9 2.2 0.9 5.0

EPS chg % 2010 EPS chg % 2011

Regional Earnings CAGR Versus PEREarnings CAGR PER

Sector 09-12F FY10F FY11FMSCI Korea 20.1 9.4 8.8

MSCI Hong Kong 13.8 15.9 14.6

MSCI Taiwan 32.0 13.1 11.6

MSCI Singapore 13.1 14.2 12.9

MSCI India 22.4 17.0 14.0

MSCI China 19.0 13.6 11.6

MSCI Indonesia 17.6 14.7 12.3

MSCI Thailand 17.1 11.7 9.9MSCI AC Asia-ex-Japan 20.2 12.9 11.5


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Table 4 DBSVI coverage sector performance

Source: DBS Vickers

PriceCompany (RP)

30-Jun-10 1M 3M 6M 12M

Consumer

Indofood Sukses 4,150 16 8 17 12016 8 17 120Bank

Bank Central Asia 5,950 12 7 23 69

Bank Mandiri 6,000 19 9 28 89

Bank Danamon 5,400 9 (1) 19 12

Bank Rakyat Indo 9,300 11 13 22 48Sector 13 8 23 59Plantation

Astra Agro Lestari 19,350 1 (20) (15) 15

Sampoerna Agro 2,275 7 (14) (16) 39

London Sumatra 8,300 5 (16) (1) 38

Sector 2 (19) (12) 22Basic Materials

Aneka Tambang 1,940 2 (17) (12) (4)

INCO 3,750 (3) (19) 3 (10)

Timah 2,150 1 (10) 8 6

Sector (1) (17) (1) (6)Oil, Gas and Energy

Bukit Asam 17,250 2 0 0 49

United Tractors 18,750 6 0 21 88

Adaro Energy 1,990 4 4 15 66

Indo Tambangraya 37,150 9 (5) 17 86

Perusahaan Gas 3,875 5 (7) (1) 23

Sector 5 (2) 9 53Telecommunications

Indosat 4,950 (2) (12) 5 (1)

XL Axiata 4,075 19 16 111 226

Telekomunikasi Indonesia 7,700 1 (5) (19) 3

Sector 3 (3) (7) 15DBSVI Universe 7.7 (0.2) 8.8 40.5

Change (%)


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Sector growth and valuationChart 9: FY10F PER versus FY09-12F earnings CAGR for various sectors in Indonesia

Source:DBS Vickers

Table 5 - 2009-12F earnings CAGR versus PERSector FY09-12F EPSCAGR FY10F PER FY11F PEREnergy 12% 15.5 12.4

Materials* 20% 15.6 13.3

Cons Discr* 16% 15.0 13.4

Cons Staples* 13% 19.8 17.4

Financials 22% 15.1 12.8

Utilities* 11% 14.6 12.5

Telecom 7% 14.8 13.3

Indonesia* 18% 14.5 12.3


*MSCI consensus forecasts (not DBSV forecasts)

Financials and consumers offer higher growth prospects.(i) Financials offer highest earnings growth potential.

Based on DBSV forecasts, financials offer FY09-12F

earnings CAGR of 22%, which is the highest among

all sectors. This is driven by strong annual loan

growth of over 20% as Indonesia has very low credit

penetration, with a loan to GDP ratio of 26%

compared to 50% in India and 120% in China. Bank

Mandiri is our top pick for recovery of written off

assets, leading to earnings upside. The sector

outperformed the market in the last one-month and

three months, with our top picks Mandiri and Rakyat

being the biggest gainers. We expect the

outperformance to continue.

(ii) Energy sector offers decent growth, need to watchfor Chinese imports. Based on DBSV forecasts, FY09-12F earnings CAGR of 12% is fairly priced in at 12.4x

FY11F earnings. The sector underperformed in the

last one-month and three months. We expect thesector to perform in line with the market as a

stronger RMB or weaker USD may lead to higher

demand from China. We like Adaro as a proxy to the

sector and for solid track record of production

growth.

(iii) Consumer staples are rich in valuation due topremium enjoyed by large cap stocks. Consumerstocks have always traded at a premium, as most of

the stocks are large cap with higher liquidity.

Unilever and Indofood are major stocks in the sector.

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Energy

Materials

Cons Discr

Cons Staples

FinancialsTelecom

UtilitiesCheap

Reasonable

Expensive


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We like Indofood for higher rubber and sugar prices

and a recovering noodle division. Out top pick Indosat

has been a consistent outperformer in the last onemonth and three months and we expect the

outperformance to continue.

(iv) Telcos offer lower growth except for XL. Based onDBSV forecasts, FY09-12F earnings CAGR of 7% is

the lowest among all sectors due to slower growth at

PT Telkom. We like XL for much higher growth than

the sector average.

(v) Materials sector offer second highest growth. Whilethe materials sector offers 20% FY09-12F earnings

CAGR, the sectors earnings are more volatile as theyare subject to spot prices.

(vi) Consumer discretionary offers third highest earningsgrowth. The sector offers 16% FY09-12F earningsCAGR with Astra International as the major stock in

the sector. The sector looks fairly valued in relation to

the growth prospects. However, the sector could

benefit from earnings upgrades given strong

consumer confidence index and loan growth.

Sector and stock recommendations

Source:DBS Vickers

Indofood Seksus

Central bank expect GDP to to expand at the upper end of the its5.5-6.0% forecast range in 2010 (4.5% in 2009).

High consumer confidence index of 110 registered in May 2010

Unilever announced plans to double its Indon business in 4 years

Consumer stapleOverweight

Adaro and Pgas Strong demand growth from domestic power plants Weaker USD may lead to higher imports from China & India

Sector not cheap after massive out performance in 1Q2010

EnergyNeutral

XL Axiata Incumbent Telkomsels 60% revenue share too high to sustain.

Mobile internet is the key catalyst for smaller players.

TelecomsUnderweight

SECTOR COMMENTS STOCK SELECTIONBanksOverweight

Strong loan growth may exceed original target of 20% in 2010

Robust outlook for the next 3-4 years, as loan to GDP ratio of only

26% presents high growth potential, without diluting ROE

Bank Mandiri, Bank Rakyat

Indofood Seksus

Central bank expect GDP to to expand at the upper end of the its5.5-6.0% forecast range in 2010 (4.5% in 2009).

High consumer confidence index of 110 registered in May 2010

Unilever announced plans to double its Indon business in 4 years

Consumer stapleOverweight

Adaro and Pgas Strong demand growth from domestic power plants Weaker USD may lead to higher imports from China & India

Sector not cheap after massive out performance in 1Q2010

EnergyNeutral

XL Axiata Incumbent Telkomsels 60% revenue share too high to sustain.

Mobile internet is the key catalyst for smaller players.

TelecomsUnderweight

SECTOR COMMENTS STOCK SELECTIONBanksOverweight

Strong loan growth may exceed original target of 20% in 2010

Robust outlook for the next 3-4 years, as loan to GDP ratio of only

26% presents high growth potential, without diluting ROE

Bank Mandiri, Bank Rakyat


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DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)BUY (>15% total return over the next 12 months for small caps, >10% for large caps)HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)FULLY VALUED (negative total return i.e. > -10% over the next 12 months)SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)Share price appreciation + dividends

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ANALYST CERTIFICATIONThe research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about thecompanies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part ofhis/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of29 June 2010, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in thesecurities recommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned

company as of 30 June 2010.

PT. DBS Vickers Securities Indonesia ("DBSVI") have a proprietary position in Bank Central Asia, Bank Mandiri, BankRakyat Indo, London Sumatra, Aneka Tambang, INCO, Timah, Bukit Asam, United Tractors, Indosat mentioned in thisreport as of 2 Jul 2010.

2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registeredbroker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentionedcompany as of 29 June 2010

3. Compensation for investment banking services:i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA have received compensation, within the past 12

months, and within the next 3 months receive or intends to seek compensation for investment banking services

from the Indofood Sukses, Bank Danamon.


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DBSVI, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA received compensation, within the past 12 months,and within the next 3 months may receive or intends to seek compensation for investment banking services fromIndofood Sukses (INDF).

ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investmentbanking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain furtherinformation, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed inthis document should contact DBSVUSA exclusively.

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