Tuesday, October 2, 2012
Indonesia strategy Investor marketing feedback
We met with US investors over the past week to discuss the outlook for Indonesia’s equity market.
Key concerns remain on the currency and the trade-off BI will have to make between a weaker rupiah or higher interest rates to slow the economy. One possible solution suggested is to raise subsidized fuel prices, which should slow oil imports. However raising fuel prices is a politically sensitive option that looks increasingly difficult as we move closer to 2014’s election. Policy flexibility is also further constrained by increasingly cautious local sentiment as the rupiah moves towards psychologically important Rp10,000/US$ levels.
On balance, we remain cautious on the rupiah, which was supported by the rupiah now weakening to levels seen prior to QE3 at about Rp9600/US$. We were more positive on the market as BI decided to raise interest rates by 25bps in Aug to help tackle the growing current account deficit. However, BI decided to halt the pace of tightening in September partly due, we believe, to
anticipation of the Fed’s QE3.
Yet QE3 is unlikely to fix Indonesia ’s trade deficit and current account deficit, in our view, given weakness in exports and oil imports that remain high due to a subsidized fuel policy and very loose monetary policy. The key question for investors is will BI be able to prevent sharp volatility in the rupiah that has occurred once every few years? Its volatility is relevant for investors as JCI
has typically performed poorly during periods of sharp rupiah depreciation.
Our top picks for the next 12 months include BRI, Mandiri, Bank BJB, Pgas, and Indosat. We received some pushback from investors on our top ideas as they include both stocks that will perform well under a strong macro outlook (banks) and those that are more defensive (Pgas and Indosat). The argument is only one scenario will be right but not both. Yet we argue that banks are fundamentally resilient especially looking at the experience during previous tightening cycles (see report Indonesia strategy – Weak rupiah reaffirms higher rates on 31 Aug 2012 for further discussion) and hence are not inconsistent with our more defensive bias.
BRI has received the most pushback among the banks that we cover for the right reasons: its volatile NIM, weakness in loans growth, competition in micro and growing exposure to the lower margin and perceived higher risk corporate segment. However we highlight that while most investors focus on the asset side of the balance sheet, the liabilities side for BRI has remained very strong with deposits growing 24% per year, outpacing system deposit growth and a remarkable feat for the second-largest bank in the country.
Our main argument is, with such a strong funding base, most of the problems BRI faced on the asset side can be fixed with time. Coupled with one of the cheapest valuations among ASEAN banks at only 8.4x FY13E PE, we remain bullish on the stock.