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Bahana Securities

23 Oct 2019 | 17:33 WIB
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Bahana Securities

23 Oct 2019 | 17:33 WIB

Lower index target, weak Q2 2015 results preview

After the dust has settled post the lower-than-expected results in the first quarter, 2015 (Q1 2015) , we have cut our overall 2015 forecast for earnings per share (EPS) growth from 11.6 percent at the beginning of the year to just 6 percent at present, reflecting the current weak domestic economy. 

In line with our reduced market EPS growth, we decrease our index target for 2015 to 5,100 from 5,800, after stripping out the President Joko “Jokowi” Widodo-related euphoria effect from the 2014 index level (i.e. 2013 index: 4,274 + 12 percent actual 2014 EPS growth + 6 percent expected 2015 EPS growth). 

However, as we head into the second half, this year (H2 2015), we recommend investors with a medium-term view to look at our end-2016 index target of 5,500, in line with our market EPS growth expectation of around 8 percent for next year. Having said that, solid progress on infrastructure-related projects could see investors beginning to price in the H1 2016 outlook, which could mean a rise to the 5,300 level (i.e. mid way between 5,100 and 5,500). 

In terms of valuation, the Indonesian market is currently trading at 2015F price earning (PE) of 18.9x (2016: 17.1x), but excluding PT Unilever Indonesia (UNVR), the 2015F PE would decline to 14.8x, before further decreasing to a more attractive level of 13.4x in 2016F. 

To help investors through the current market volatility, we have provided our Q2 2015 results preview (actual earnings to be released by the end of July) based on the 97 stocks under our coverage. For the market as a whole, we expect Q2 2015 operating profits to be down 3.1 percent (Q1 2015: -2.2 percent), vs +10.5 percent back in Q2 2014 (Table 1). 

On the bottom line, we expect growth deceleration from 2.9 percent in Q2 2014 to -1.9 percent in Q2 2015 (Q1 2015: -8.8 percent) with the culprits being the rupiah depreciation against the US dollar and continued weak Gross Domestic Product growth, which we expect to come in at 4.9 percent this quarter (Q1 2015: 4.7 percent; 2015F: 5.03 percent). 

The Good

In the consumer space, we mostly expect a deceleration in earnings growth, although overall performance has remained better than that of the overall market. While we expect consumer staples to book above-market growth rates at both the operating and net-profit levels, we note that consumer discretionary should actually be in the Ugly section given expected poor performances at both those levels. 

Due to its defensive nature, staples should perform better than discretionary. For staples, support will likely stem from price increases and lower raw-material prices while for discretionary (retail/media), companies could suffer from swelling operating expenses such as salaries, utilities and rentals, which would outstrip top-line growth (for retailers). 

For media companies, slower growth in ad-spend should cap top-line growth, while we expect margin erosion from higher programming costs. In poultry, average day-old- chick (DOC) and broiler prices have thus far in Q2 2015 recovered to almost break-even levels for industry players. Given this and the low base effect from Q2 2014, we estimate some 21 percent net profit growth in Q2 2015. Going forward, we expect purchasing power to recover and increasing demand for broiler meat to support DOC prices. 

For the telcos, players will likely continue to benefit from solid revenue growth on significant increases in data revenue growth backed by a higher number of smartphone users as well as higher data usage. On the net profit side, strong growth is likely due to the low base effect in Q2 2014, which in turn was due to the worse-than-expected performance of PT XL Axiata (EXCL). In the banking sector, we expect earnings deceleration from slower loan growth although the banks will benefit from a relatively lower base in Q2 2014 due to the liquidity crunch. 

On infrastructure-related, we expect a worse performance compared to Q2 2014 due to late budget disbursements and ministerial restructuring which have caused delays to government projects. However, we expect bottom-line support from higher-margin subsidiaries in the property and precast businesses.

The Bad

In the bad section, there is only one sector: property, which we expect to experience modest operating profit performance on conservative top-line growth. At the net profit level, we expect a steep decline (Table 3) largely due to PT Bumi Serpong Damai (BSDE) having booked a massive Rp 1.7 trillion acquisition gain in Q2 2014.

The Ugly

In cement, continued weakness in commodity prices and the property market has negatively impacted domestic cement sales so far in Q2 2015. Additionally, increased production capacity by new and existing players has created greater competition, especially in Java, which is hurting companies’ margins.

The auto sector will likely continue its weak performance in Q2 2015 due to slow auto sales and severe discounting on the back of weak purchasing power on lower GDP and lower farmers’ incomes due to weak commodity prices.

For metals, the average Q2 2015 nickel price to date is down 29 percent year-on-year (yoy) to US$13,100 per ton, thus impacting PT Vale Indonesia (INCO) profitability, while PT Aneka Tambang’s (ANTM) higher grade ores increased its ferronickel sales amid lower production costs. The to-date Q2 2015 tin price has dropped 33 percent yoy to $15,420 per ton since China, the biggest tin consumer, is experiencing slow economic growth in Q2 2015. However, the new tin export policy, effective July 2015, should have a slightly positive impact on the tin industry.

For oil, it is clear that players are hurt by the current low oil price environment, with the price averaging $64.9 per barrel in Q2 2015, down around 40 percent yoy. The coal price is down 21.2 percent yoy to $56.9 per ton and should impact all coal players, with PT Harum Energy (HRUM) likely to be hit the most as the company has reduced its production volumes amid the weak coal price environment.

In plantations, we expect much lower net profits on the back of low crude palm oil (CPO) prices, which have depreciated around 16 percent yoy in Q2 2015 so far. We think some companies like PT Astra Agro Lestari (AALI), PT Salim Ivomas Pratama (SIMP), and PT PP London Sumatera Indonesia (LSIP) are also experiencing flat yoy growth on weak fresh fruit bunch (FFB) production due to lower margins compared to last year.

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