Refer to Important disclosures in the last page of this report
Premier Insight
28 September 2018
Economic Update
A move of anticipation
Monetary decision was anticipative policy rate increase to 5.75%.
Domestic market was relatively calm during decision time.
Decision was mostly about maintaining market attractiveness.
Anticipating one more policy rate increase in 4Q18.
Policy rate increase. The central bank increased again policy rate 7DRRR by 25bps to 5.75%, an increase of 150bps ytd and in line with consensus expectation, while consequently also shifted up deposit and lending facility rates to 5% and 6.5%. We believe this manoeuvre is an anticipation strategy to attract inflows and improve the BOP position rather than to calm the market, considering (1) Tamed volatility within the past two weeks, (2) Increasing net purchasing activity from foreign holders. Given the 5x rate increase already taking place throughout the year, another increase is still expected to materialise in 4Q18.
Calm market. We think domestic financial capital market had been more stable during rate-decision time with returning confidence to EMs and careful selection to EMs with better fundamentals, including Indonesia. Except for the Philippines, the last few weeks had seen inflow improvement in most Asian EM peers, with Indonesia experiencing largest development. With 10-year sovereign yields at 8.18% and declining by 34bps within two weeks and net inflow in bond market of c. Rp11tn, situation was a contrast against early September. The momentum appeared to be utilised by BI to allow IDR depreciation more to its downward trajectory, as applying average year’s sensitivity analysis, it is implied that exchange rate should translate to c. 0.8% appreciation as opposed to a factual 0.5% depreciation in two-weeks time.
Maintaining attractiveness. The mood behind registering higher policy rate was on the back of supporting domestic financial market, which, despite being relatively calm at the moment of decision, is nevertheless still exposed to global uncertainty. The Federal Reserve just increased Federal Funds Rate to new range of 2.00-2.25% and therefore generated a positive real interest rate (Jul18’s PCE inflation was 2% yoy), which should create a stimulant for funds flying out from EMs. We observe BI’s concern now adds global growth inequality – where EMs are forecast to grow less than earlier expectation – in addition to the US’ trade tension along with other countries, which may contribute extra risk for flight for safety. Additionally, we also view Indonesia’s Aug18 trade data realisation contributed to the decision, as reading had set a US$-3bn deficit in two-third of 3Q18, potentially setting yet again a stressed 3Q18 current account.
Another policy rate increase expected. With volatility expected to remain prevalent and theming through the 4Q, another 25bps increase is anticipated as there should be increasing need for foreign currency as households procure goods and services to overcome year-end holiday and Christmas season. We estimate exchange rate to depreciate further by c. 0.8% in line with fundamental value and fluctuation. Along with the new policy rate, BI introduced a new regulation to implement domestic non-deliverable forward (DNDF) transaction, which uses JISDOR as its benchmark and requires underlying transaction in form of trade, investment, and bank loan in foreign currency. The success of this newly-implemented measure should help trim rupiah volatility going forward.
JCI Index
Index Closing 1 day 1 year YTD
JCI 5,929 1.0% 1.5% -6.7%
Commodities Last price Ret 1 day Ret 1 year
PremierInsight
2
Refer to Important disclosures in the last page of this report
Retail Update
Meeting with Retailers’ Association
The retail sector still maintained its solid growth in 2018.
Increase in import tax should not have real impact to retailers.
New E-commercelaws to be passed in 4Q18.
Our top picks: MAPI, ACES, followed by LPPF.
Robust growth in the retail sector still continues. According to HIPPINDO (Indonesian Shopping Center Tenant Association), retail sales in 9M18 sustained its strong momentum, maintaining a double digit growth. Looking more closely amongst their members, F&B and Minimarkets segments recorded the strongest growth, followed by Supermarkets and entertainments, then lastly Hypermarkets which recorded negative growth. Higher-end retailers are also outperforming the middle-low segment, recording stronger growth throughout the year. Rental rate is also expected to grow at a more modest rate going forward, since occupancy rate are declining in many malls. Overall, the Association is still optimistic on the retail industry growth in the near future. These findings are in-line with our bullish stance on the retail sector going forward.
Immaterial impact from increase in import taxes. Recently, due to the increase in the country’s current account deficit (CAD), the government has decided to increase taxes (PPH import) on 450 imported goods. This has led many people to put a negative sentiment on the retail sector, especially companies with considerable import components, as concerns over earnings loomed. However according to Hippindo, there should not be any material impact to the companies’ bottom line, as this will only affect cash flow. Now companies will just have to pay their import tax in larger sum upfront, but they will still be paying the same amount of tax at the end of the day.
VAT refund during Asian Games 2018 was below expectation. This is based on lower than expected VAT refunds in five main international airports in Indonesia. Hippindo claimed that the Rp5mn (USD343) minimum transaction to be able to receive VAT refund is too high, in fact it is the highest amongst the ASEAN countries (average USD100). They have proposed to the government to lower this VAT refund minimum transaction to Rp1mn. We think this is a good initiative from Hippindo, as the brick and mortar retailers need to quickly capitalize on trends, while moving away from the reliance on promotions which encouraged consumers to spend only during sales and promotion periods.
New E-commerce laws to be passed by the government. In the recent years, e-commerce or online retailing has not been tightly regulated by the government. This has resulted in many SMEs and smaller shops to close down, as they were not able to compete with the prices these e-commerce offers. In order to protect these local retailers, the government is planning to pass new e-commerce law in 4Q18. One of these laws will serve to regulate the minimum local content (KDA) for online retailers. This new law will require online retailer to have a minimum of 60% local content in their total SKUs. This can still be considered relatively lenient, as offline retailers need to comply with 80% local content. Our top picks: MAPI, ACES, followed by LPPF.
3
Refer to Important disclosures in the last page of this report
News & Analysis
Corporates
BDMN: Bank Danamon (BDMN IJ; Rp7,175; Hold) has signed conditional agreement for sale of 70% stake (out of 90% ownership) in Asuransi Adira to Zurich Insurance Co. Ltd, pending regulatory approval. Zurich also plan to buy 10% stake from Willy S. Dharma. The acquisition is valued at Rp3.9tn for BDMN’s 70% stake. (Bisnis Indonesia).
Comment: We view this acquisition as neutral to BDMN – the sales proceed is equivalent to 10% of the bank’s equity capital but we believe the bank is already over-capitalised with high CAR of 21.7%, low asset/equity leverage of 4.6x (vs. c.6x for peer major banks) despite slow asset growth in past 5 years. We reiterate our Hold rating.
ISAT: Indosat (ISAT IJ; Rp3,000; Hold) supports 4.0 industry revolution in Education (Edu 4.0) sector. The company held event attended by 45 national colleges/universities with topic “Empower Facilities towards Edu 4.0”. Based on cooperation, ISAT will prepare connection between universities to be used together as access to research network (“Indonesia Research and Education Network”) and sharing resources. (Investor Daily).
Comment: We expecti insignificant impact to our estimates as most of ISAT’s revenue is contributed by cellular services. We have a Hold with TP Rp3,500.
MYRX: Hanson International’s (MYRX IJ; Rp128; Not Rated) Extraordinary General Meeting of Shareholders (EGMS) approved the right issue plan with target proceed of Rp16tn to finance the development of Grand Jakarta project, mostly for a 16,000ha land acquisition stretching from Serpong to Maja to complement company’s Serpong-Maja toll road. The right issue plan will offer 87.8bn shares with the nominal price of Rp22/share. In addition, MYRX booked strong marketing sales of Rp1.5tn in 7M18 (+50% yoy), supported by sales from Citra Maja, Forest Hills, Millenium City of Rp556bn, 134bn, Rp360bn, respectively. (Kontan).
SMRA: Summarecon Agung (SMRA IJ; Rp595; Hold) reported earnings of Rp78bn in 1H18 (+61% yoy), which came below market expectation, forming 19% of our/consensus FY18F forecast. Revenue was flat -1% yoy, but grew 23% qoq, with margin improvement due to limited lauching where COGS declined by 7% yoy. SMRA booked positive cash flow of Rp184bn in 1H18, which is company’s best performance since 2016. In quarterly basis, SMRA booked earnings of Rp36bn in 2Q18 (-13% qoq), much stronger that 2Q17 and 2Q16 where company booked losses of Rp23bn and Rp4bn, respectively.
(Rp bn) 1H18 1H17 YoY 2Q18 1Q18 QoQ % of
Comment: The result was below our expectation, thus maintain our Hold call on SMRA with TP of Rp700.
WSKT: Waskita Karya (WSKT IJ; Rp1,695; Buy) just received payment of Rp3.9tn for LRT Palembang 4th termin payment. The remaining Rp5.1tn will be paid from 2019 state budget. (Company).
PremierInsight
4
Refer to Important disclosures in the last page of this report
Markets & Sector
Infrastructure sector: Government will offer three Light Rail Transit (LRT) projects to foreign investment in IMF World Bank, October 2018. The projects offered are LRT Medan, LRT Surabaya, and LRT Bandung with investment worth of Rp5-10tn for each project. In addition, government will also offer two airports expansion projects, namely Kualanamu Airport and Zainudin Abdul Madjid, Lombok with investment worth of Rp3-5tn for each project. (Bisnis Indonesia).
Comment: We are positive towards the news as foreign investment will help government fund major infrastructure project, without dragging down SOE contractor’s cash flow and balance sheet through the appointment of turnkey projects.
Pharmaceutical sector: Government expects the investment in pharmaceutical sector and drug manufacturing to grow steadily at 10%. Government believes the increasing medicine needs and National Health Insurance Program (JKN Program) are two catalysts for this industry. According to Government, JKN Program already achieves to 75% Indonesian population. (Bisnis Indonesia).
Telco Sector: Erricson predicts 2017-23F global data traffic to grow 39% CAGR. Erricson also estimates that more than 20% of global cellular data traffic to use 5G. Erricson Indonesia said 5G could be one of important infrastructures for industry digitalization and supporting Gov’t’s ambition in “Making Indonesia 4.0”. Based on news last month, Industrial Ministry has set 5 manufacturing sectors to pioneer 4.0 industry implementation in Indonesia which are: F&B, electronics, automotive, chenmical, and textile and apparel industry. Previously, several telco operators held trial phase for 5G (yet commercial) in July/Aug 2018. (Investor Daily, Bisnis Indonesia, Kontan).
Head Office
PT INDO PREMIER SEKURITAS Wisma GKBI 7/F Suite 718 Jl. Jend. Sudirman No.28 Jakarta 10210 - Indonesia p +62.21.5793.1168 f +62.21.5793.1167
INVESTMENT RATINGS
BUY : Expected total return of 10% or more within a 12-month period HOLD : Expected total return between -10% and 10% within a 12-month period SELL : Expected total return of -10% or worse within a 12-month period
ANALYSTS CERTIFICATION.
The views expressed in this research report accurately reflect the analyst;s personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.
DISCLAIMERS
