Indonesia Strategy (OVERWEIGHT): GDP Growth Bottoming Out - Daily Pack 6 May 2014

Good morning,

Indonesia’s economic growth reached the bottom in 1Q14, and trade data was encouraging with strong vehicle exports. The data also indicates that 1Q14 current account deficit (CAD) will be higher than expected, however FY14 CAD will be signicantly lower than that in 2013. As we are awaiting the announcement of a political party coalition, the market will be driven more by political event than economic data. We maintain our OVERWEIGHT call on JCI.

       GDP growth bottoming out. 1Q14 GDP grew at 5.2%, slighly lower than our estimate, but  we believe it was bottoming out as going forward, higher government spending should be seen in April 2014 and the impacts of mineral export ban should normalise. Consumer spending and investment still grew by 5.6% y-o-y and 5.1% y-o-y, respectively.  Furthermore, we believe the impacts of tightening measures implemented by the central bank since mid 4Q13 have been fully reflected in the economy.

       Encouraging trade data amid higher expected CAD. Indonesia recorded trade surplus at USD1.1bn in 1Q14 from USD2.3bn in 4Q13 and it shows an encouraging development as exports were up 3.9% m-o-m, driven mainly by higher exports of vehicle (+15.7% m-o-m), coal (+14.8% m-o-m) and CPO (+12.1% m-o-m). The high vehicle exports signal the positive impacts of capacity expansion in the auto sector since two to three years ago. Nevertheless, according to our economist, the data will likely point to higher CAD in 1Q14 from 4Q13. Our estimation for the 1Q14 CAD is roughly at around 2.3% of GDP, higher than 2.0% of GDP in 4Q13. In the end, we believe the estimated FY14 CAD number of 2.6% will be better than 3.2% in FY13.

       Politics still driving the market. It seems that the economic data do not really affect the market’s appetite as all of us are awaiting the nomination of vice presidential (VP) candidate for Joko Widodo (Jokowi), Indonesian Democratic Party of Struggle (PDIP)’s presidential candidate and the coalition among political parties. The political development, in our view, will determine the path of the market. While there is no clarity, the market has speculated that Jokowi may run with Jusuf Kalla – but in our view, this speculation is premature. The uncertainty remains especially after some surveys show that Jokowi’s popularity is declining while on the other hand, Prabowo Subianto’s popularity is improving.

       JCI: cheap or dear? Valuation-wise, JCI - at  15.2x forward P/E is trading at its 3-years average of 15.3x P/E. JCI has been re-rated since 2010 following the recovery of consumer spending and soverign rating upgrade, not to forget the impact of Federal Reserve’s quantitative easing to the global liquidity. However, we are of the view that good political news can drive further JCI valuation. Backed with expected recovery in corporates’ FY14 earning, the return/risk ratio is still attractive.

       Maintain OVERWEIGHT. We like banking, consumer, construction, plantation and retail sectors. Our Top Picks are: Bank Rakyat (BBRI IJ, BUY, TP: IDR12,000), Bumi Serpong (BSDE IJ, BUY, TP: IDR2,400), Semen Indonesia (SMGR IJ, BUY, TP: IDR16,700), TiPhone (TELE IJ, BUY, TP: IDR1,000).  (Agus Pramono)

ON THE PLATTER:

Agung Podomoro Land (APLN IJ, BUY, TP: IDR337) Results Review: Increasing Contributions From Recurring Revenue

Bekasi Fajar (BEST IJ, NEUTRAL, TP: IDR680) Results Review: Bleak Results

Bumi Serpong Damai (BSDE IJ, BUY, TP: IDR2,400) Results Review: Results On-Track

Ciputra Development (CTRA IJ, BUY, TP: IDR1,370) Results Review: Weak Apartment And Office Sales Drag Earnings

Ciputra Surya (CTRS IJ, BUY, TP: IDR4,830) Results Review: Solid Balance Sheet

Lippo Cikarang (LPCK IJ, BUY, TP: IDR13,400) Results Review: A Strong Start

Lippo Karawaci (LPKR IJ, BUY, TP: IDR1,500) Results Review: Still On Track

Media Nusantara Citra (MNCN IJ, NEUTRAL, TP: IDR2,750) Results Review: Lower 1Q14 Audience Share

Summarecon Agung (SMRA IJ, BUY, TP: IDR1,450) Results Review: Warming Up The Engine

Surya Semesta Internusa (SSIA IJ, NEUTRAL, TP: IDR1,025) Results Review: Back To Its Construction Arm

1Q 2014 Growth Moderated Due To  Weak Exports, But Domestic Demand Remained Resilient

                                              

MEDIA HIGHLIGHTS:

Garuda Indonesia negotiates over Citilink

BEST is expanding in real estate

Indonesia Eases Foreign Investment Rules for Some Industries

Government to limit starter pack sales

The government revised negative investment list

Best regards,

RHB OSK Indonesia Research Institute

Disclaimer: This message is intended only for the use of the individual or entity to whom it is addressed and may contain information that is confidential and privileged.  If you, the reader of this message, are not the intended recipient, you should not disseminate, distribute or copy this communication.  If you have received this communication by mistake, please notify us immediately by return email and delete the original message.  This message is transmitted on the condition that the recipient accepts the inherent risks in electronic data transmission and agrees to release RHB group and PT RHB OSK Securities from any claim which the recipient may have as a result of any unauthorized duplication, reading or interference with the contents herein. The contents herein are made in the personal capacity of the above-named author and nothing herein shall be construed as professional advice or opinion rendered by RHB group and PT RHB OSK Securities or on its behalf.