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Premier Insight
2 February 2018
Economic Update
The prospect of and ahead of rice
Jan18 inflation subsided to 3.25% yoy, rice price among the main
culprits.
Core inflation lowered but hardly worrying.
We would be vigilant on global oil price and its upward trajectory.
BI signals toward other instruments outside rate ahead.
Rice-backed inflation. We believe inflation decline to 3.25% yoy (Dec17: 500tnd rice import by the Ministry of Trade. We should expect rice price gradually soften in upcoming months as the impact of harvest season and imported rice – due by policy – permeates.
Low but satisfactory core inflation. Core inflation, on another hand, had now again reached another low at 2.69% yoy driven by steep decline in transportation as well as housing and utilities. The extent where it was declining should be, to us, non-worrying, since core inflation had instead picked up on monthly basis (0.31% mom) against few months prior to Dec17. Moreover, where prices were lower, the contribution of which came from factors considered either seasonal (such as transportation, which picked up during holiday season but saw decline right afterward) or due to better policies such as the food supply management.
Careful on global oil price. Notwithstanding the positive developments, we would be cautious on the current trajectory of oil price, whose Brent price as of Dec17 had recorded US$64.4 per barrel (+2.7% mom). Indonesian crude oil price (or ICP) has traditionally experienced one to few months lag when it comes to adjustment with global oil price; ICP stood at US$61 by Dec17 and certainly would look for some upward revision. ICP alone to consumer prices is somewhat inelastic (~0.04 elasticity, according to our calculation) but goods categories directly or indirectly related to oil such as housing and utilities as well as food and transport make around 24-28% contribution, each. Despite the slow translation from Brent to ICP, we would consider this among risks of inflation this year.
Concentrating on measures outside reference rate. With the Federal Reserve looks firm on increasing FFR next Mar18 and better growth in developed economies such as that in the Eurozone, on top of possible upward shoot in domestic inflation, the perils of situation as of now would, at some point, weighs on BI’s consideration for rate increase. That, however, is less likely to happen this month, more probably less this quarter. The reason of which comes from BI governor, whom has signaled its preference to resort to other instruments when it comes to monetary policy. The idea will be even more resonated, given intensive capital inflow in the bond market of Rp33tn in Jan18. With average reserve-requirement ratio and other measures look to be implemented in Jul18, early months this year should be free of rate adjustments.
JCI Index
Commodities Last price Ret 1 day Ret 1 year
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News & Analysis
Corporates
BEST: Bekasi Fajar (BEST IJ; Rp316; buy) with three of its subsidiaries, PT Bekasi Matra Industrial Estatte, PT Bekasi Surya Pratama, and PT Best Sinar Nusantara gained syndicated land of US$75mn in January 2018. The loan with additional option up to US$130 will have maturity of 8 years with interest of 5.5% + 3months LIBOR. The loan comes from Eximbank and Bangkok Bank Public Company Limited Jakarta Branch. The loan will be use to refinancing maturing US$ loan. (Kontan).
Comment: We are neutral on this loan issuance as the purpose is to refinancing maturing loans. Maintain Buy on BEST with TP of Rp380.
EXCL: XL Axiata (EXCL IJ; Rp2,940; Buy) has announced its FY17 financial result which was relatively inline with our and consensus numbers. The company has yet to release operational numbers. Overall we see weak growth as EBITDA only grew +3.3% yoy in FY17 and dropped -7.1% qoq in 4Q17 due to increase in salary and wages of 96.4% qoq in 4Q17. Selling expenses also increased 23.4% qoq, affecting slower growth in EBITDA. Bottom line was flat due to a mixed of different part such as decline in gain in asset sales, increase in forex losses, and reduction in interest cost. Furthermore, XL continued to book tax benefit to support its bottom line. We maintain our Buy call, as we expect faster growth in FY18 from generic growth and events such as regional election. (Company).
FY17 FY16 % 4Q17 3Q17 % FY17F % Rp11tn) which is still mainly contributed from Waskita Karya (WSKT IJ; Rp2,800; Buy) (60%) and followed by external project (40%). In the other hand, Wijaya Karya Beton (WTON IJ; Rp590; Buy) targets new contract of Rp7.8tn (vs. FY17: Rp7.3tn) which mainly will come from government project (70%) and private (30%). On separate news, WSBP just received payment for turnkey project Becakayu section 1BC worth Rp1.55tn in Jan 2018 after received partial payment of Rp429bn in Dec 2017. (Company, Bisnis Indonesia).
Comment: Given strong new contract achievement in FY17, we are confident both WSBP and WTON will continue its good performance in FY18. Maintain Buy on WSBP and WTON with TP of Rp620 and Rp810, respectively.
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Markets & Sector
Coal Sector: The issue about lower domestic coal price for state electricity company (PLN) re-emerge as PLN’s President Director, Sofyan Basir came before President Joko Widodo to request a regulation for lower domestic coal price to maintain the company’s margin and cash flow which needed to accomplish government electrification ratio target of 97% (from the current 93%). Currently, the Ministry of Energy and Mineral Resources (ESDM) is preparing domestic coal price regulation regarding this issue. However, Minister of Energy and Mineral Resources, Ignasius Jonan stated that cost plus margin scheme would not be used as it will not encourage cost efficiency for coal miners and PLN. (Bisnis Indonesia).
Economic
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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.
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