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Thursday, March 24, 2011

Japan Earthquake & Nuclear Crisis Impact to IHSG

by Samuel Securities

Earthquake in Japan and nuclear crisis has triggered equity sell-off in the equity market. Nikkei 225 plunged 18.3% since Friday (11 March’2011), followed by other Asia Pacific markets. We anticipate that the disasters in Japan would have some adverse impact on Indonesia economy given:

• Japan is the biggest export destination for Indonesia for non oil and gas products, accounting around 14% of total exports in the past 5 years.
• Japan is the fourth largest foreign director investor to Indonesia, contribute US$713 mn in2010. Earthquake damages might lower Japan’s investment to Indonesia.
• We expect the Q2-2011 economic growth will be affected to 6.1% yoy from initial target of 6.2% yoy, while we maintain our real GDP growth of 6.6% yoy in FY 2011.


Sectors with most exposure to Japan

We view that mining sectors and heavy equipment could be negatively affected as they have the largest exposure to Japan.

• Mining sectors (ANTM, INCO, TINS). Around 15% of ANTM’s sales were contributed from Japan, while 20% of INCO’s sales were generated from Japan. In the short term, we believe the metal sectors will be affected as demand from Japan will be less than normal which will result in the decline of sales especially, for ANTM and INCO. Indonesia’s nickel export to Japan is expected to decline more than 30% this year. However, we view that Japan’s reconstruction efforts will be positive for commodities in long run

• Heavy Equipment (HEXA, UNTR). For UNTR, supply of large equipment from Komatsu Japan will disrupt as 3 of 10 Komatsu’s plants was damaged. Large equipment contributed around 50% to revenue. Meanwhile, majority of HEXA’s heavy equipment type is Hitachi. Hitachi confirmed that as much of 6 factory was damaged (include non heavy equipment factory).

Sectors to benefit

• The disruption in Japan’s nuclear power plants will possibly switch to more coal and LNG. Hence, coal companies will benefit on higher coal demand. We view that there is a possibility the negotiation of new coal price contract between Japan and Australia that is expected to happen this/next week will be delayed. Please note that new contract price usually base on Japanese calendar that will expire at the end of March. BUMI, ITMG, HRUM, ADRO will benefit the most as they have high exposure to export market (around 90% export). Moreover, BUMI is the most sensitive to coal price fluctuation.

Sector with Neutral impact

• Reconstruction post earthquake will be positive for cement and commodities esp steel. Nonetheless we view that the impact towards Indonesia is neutral as cement will be supplied from China and steel from Korea.

Market Outlook – Maintain JCI target of 4,209

• JCI has achieved 27% CAGR in 2005-2010 with 19.2% CAGR EPS growth. Currently JCI is trading at 14.0x PER’11, relatively higher than 5 years average of 13.1x. We are cautious on inflation fears but we believe our macro economic remain intact with strong GDP growth of 6.6%.

• The current spread between 10 year government bond and earning yields is narrowed to 1.37%. We expect risk appetite on equities appear when the spread close to 1% or at around 13.0x PER’11

• Our JCI index target remain at 4,209 based on 16.7x PER’11 with expected EPS growth of 18.2%, mainly from commodity related sector.

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