The market is currently confronted by triple
troubles from: 1. IDR weakness from funds outflows and 2Q13 current account
deficit of 4.4% of GDP; 2. Lower growth due to higher interest rates and BI’s
attempt to prevent rising NPLs by lowering LDR requirements; and 3. Scaled-back
QE possibly starting in September.
These concerns have caused nearly 20%
market pullback since recent peak at 5,215, allowing for buying
opportunities.
We are of the view that investors must
attempt to look forward when it comes to the current account deficit, as
looking at 2Q13 level will provide a distorted view given that the impact of
the fuel price hike is still absent during the period.
On the local currency front, we believe
the IDR will strengthen over the medium term on three factors: 1. Increased
interest rates; 2. Higher exports; 3. Continued FDI into Indonesia.
On the latter, we think that Indonesia
will continue to benefit from demand displacement from China. With labor shortage and wages in the coastal
areas at USD600 per month, companies are relocating from China to Southeast
Asia, and in particular Indonesia given the country’s young and plentiful
population base, ensuring a sufficient work force.
In the export front, if the US and Euro
zone are experiencing improved economic condition, Indonesia’s exports will
eventually improve over the medium term in our view. This, coupled with higher interest rate (we
believe the central bank will hike at least another 25bp), will help shore up
confidence in the local currency going forward.
Other market support will stem from the
plan of the Financial Services Authority (OJK) to allow share buybacks without
the need for EGMs to help support the market. Meanwhile, the government has also instructed
state-owned companies to implement share buybacks.
Hence, we believe it is time for
investors to begin bottom fishing, accumulating stocks with solid
fundamentals. Exhibit 1 below shows our top 10 picks which
comprised of stocks which have the capability to withstand current short-term
market shocks.
Sector wise, we like companies in
defensive industries such as consumer and telco. We think that values in TLKM (-10% drop since its recent peak), GGRM (-35%), KLBF (-13%),
ICBP (-22%), EXCL (-19%),
and TELE (-29%) have emerged.
On banks, our top pick is BMRI (-27%) which benefits from a rising interest
rate environment as it holds the most variable government bonds. PGAS (-20%) is
another defensive name we like with one of the highest ROEs while SRIL is a new
listing with a captive domestic market in military uniforms and resilient
exports due to demand displacement from China and Bangladesh.
In conclusion, before you throw out the
bathwater, it would be advisable to ensure that your baby (read: stocks) is
well worth keeping.
Exhibit 1. Top 10
picks, 2014F valuation
Mkt cap.
|
Price
|
TP
|
Upside
|
EPS gwt.
|
PE
|
P/BV
|
Yield
|
ROE
|
|
(USDm)
|
(IDR)
|
(IDR)
|
(%)
|
(%)
|
(x)
|
(x)
|
(%)
|
(%)
|
|
TLKM
|
22,928
|
10,950
|
14,500
|
32
|
7.6
|
13.5
|
2.9
|
3.8
|
22.3
|
BMRI
|
18,419
|
7,600
|
10,300
|
36
|
13.1
|
9.2
|
1.8
|
2.7
|
20.9
|
PGAS
|
12,715
|
5,050
|
6,800
|
35
|
2.1
|
13.7
|
4.6
|
4.1
|
38.2
|
GGRM
|
7,494
|
37,500
|
55,000
|
47
|
16.5
|
13.8
|
2.2
|
2.2
|
16.5
|
KLBF
|
7,067
|
1,340
|
1,580
|
18
|
14.0
|
28.8
|
7.1
|
1.7
|
26.3
|
ICBP
|
5,996
|
9,900
|
14,700
|
48
|
12.9
|
20.7
|
3.5
|
1.0
|
18.2
|
JSMR
|
4,167
|
5,900
|
7,300
|
24
|
18.3
|
20.1
|
3.6
|
2.0
|
19.0
|
EXCL
|
3,723
|
4,200
|
5,375
|
28
|
4.2
|
10.2
|
1.8
|
4.9
|
18.2
|
SRIL
|
492
|
255
|
360
|
41
|
18.9
|
23.1
|
1.3
|
0.0
|
12.3
|
TELE
|
278
|
495
|
900
|
82
|
20.8
|
7.8
|
1.7
|
4.0
|
23.0
|
Source:
Bloomberg, Bahana estimates
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