Following recent 4Q14 results releases, we have fine-tuned all 95 stocks under our coverage (76% of the total market capitalization of the index) to take into account the most recent operating trends in the marketplace.
In line with Indonesia’s 1Q15 subdued economic performance due to weak global growth and lower commodity prices, exhibit 1 shows our new 2015 operating profit and EPS growth for the market.
Exhibit 1: Market Data
Source: Bahana Estimates
On the back of our earnings downgrades, mainly in plantation and oil and gas sectors, the Indonesian market is currently trading on 2015 PE of 20.8x, the most expensive in the region. However, exhibit 1 shows a slightly higher 2015 EPS growth estimate of 12.1% from 10.8% previously on lower 2014 earnings.
We have also come up with our expected new 1Q15 corporate results, with overall operating-profit growth anticipated to decelerate from nearly 11% y-y in 1Q14 to less than 3% y-y in 1Q15 (exhibit 2). At the net-profit level, we also expect a similar trend, with an overall 1Q15 contraction of 7.1% y-y, compared to the 20% y-y growth seen back in 1Q14.
Exhibit 2: Market Performance
Source: Companies, Bahana
The culprits of the earnings slowdown are expected to include a 1Q15F top-line drop of 3.3% y-y, as well as IDR depreciation which is likely to have caused FX losses for leveraged companies with USD borrowings.
Despite the six sectors in this category having booked above-market growth rates at both the operating and net-profit levels, two (consumer and banks) experienced growth deceleration in 1Q15 compared to 1Q14 levels.
Exhibit 3: The Good
Source: Companies, Bahana
On the metals front, the sector should have been mostly helped by the performances of ANTM (due to cost efficiencies) and PSAB (on a production ramp-up as two of its new mines have started operations).
Going forward, with QE in both Japan and the Eurozone taking place, we expect money to be put into precious metals, allowing for improved performance, particularly for gold and silver plays.
While the poultry sector performed poorly in 4Q14 on weak DOC prices and depressed margins, we expect a turnaround in 1Q15, supported by lower corn and soybean prices.
For property, the sector’s performance should be backed by PWON (on the consolidation of a new subsidiary) and CTRP (stemming from a new accounting practice on recurring income).
On infrastructure-related companies, the sector’s above-market performance was mainly supported by forays into non-core businesses such as property and pre-cast.
In the consumer space, we mostly see a deceleration in earnings growth, although performance should remain higher than the overall market.
For staples, support should come from price increases and lower raw-material prices, offsetting the adverse impact of IDR depreciation. We think it is worth noting that, within consumer discretionary (retail/media), companies mainly have suffered due to swelling operating expenses such as salaries, utilities and rentals, which likely have outstripped top-line growth (for retailers).
For media companies, slower growth in ad-spend should have capped top-line growth, while higher programming costs should have eroded margins. In the banking sector, earnings deceleration was likely caused by slower loan growth and increased provisioning.
In the “bad” sector, we expect only one industry with mixed performances in terms of operating and net-profit results relative to the market (exhibit 4).
Exhibit 4: The Bad
Source: Companies, Bahana
In the telco-related industry, we expect some support in 1Q15, helped by easing competition which should have resulted in higher ARPUs and margins. However, we expect bottom-line performances to be negatively affected by the weak IDR.
In the automotive sector, poor performance should stem from unexciting volumes and weak margins as a result of escalating competition, which we expect to persist into 2Q15.
In cement, players have suffered from squeezed margins following the January 2015 cement price cut of IDR3,000/bag and soft volumes due to soft ex-Java demand caused by weak commodity prices. Within the oil-related sector, operating performance should be mainly dragged down by lower oil prices.
Exhibit 5: The Ugly
Source: Companies, Bahana
For the plantation sector, operating performance should be eroded by weak ASPs due to the lower global oil price and the depressed soy bean oil price. Additionally, we expect unexciting CPO production volumes to continue into 2Q15 due to unsupportive weather conditions.
Finally, on the coal front, the sector should be hurt by continued lower prices despite the USD appreciation against the IDR.
At this stage of the market cycle, our top 10 picks are mostly defensives (staples and telcos), although we are starting to adopt a more positive view on precious metals due to QEs in Japan and the Eurozone. Hence, we now include PSAB as one of our top picks.
Additionally, we are positive on the shipping sector on President Jokowi’s maritime measures, and add SOCI to our top buy list. On a more negative note, we remove JSMR, WIKA and PTPP from our top buy list on possible negative sentiment stemming from the government’s tax revenue shortfall leading to budget cuts in infrastructure spending.
