As we expect a more positive outlook for the market in 2016 due to an improvement in GDP growth, relatively benign inflation allowing the central bank to potentially cut interest rates post the Fed lift-off, and better execution in infrastructure projects as the administrative constraints have been removed and the government has more room to run larger deficits, we expect the first beneficiaries to be rate cyclicals, such as construction, property, banks and infrastructure. Meanwhile improved consumption will follow with a lag as it is not sensitive to interest rates (more so to incomes and GDP growth). Telcos and Staples are also (as noted above) at more elevated valuations.
Translating this into stocks, the following are our preferred Indonesian stocks:
PTPP (PTPP IJ, BUY, TP: IDR 4,800): This is the most leveraged construction stock to an improvement in infrastructure spending, proven by its good track record in execution, favourable order book and short cash conversion cycle. Even though it has outperformed the market this year, we expect outperformance to continue.
Jasa Marga (JSMR IJ, BUY, TP: IDR6,500): Similar to PTPP, Jasa Marga is highly leveraged to benefit from an improvement in infrastructure as the largest toll-road operator in the country. Even though performance this year has been severely affected by government intervention, we note that policy making has improved.
Bank Mandiri (BMRI IJ, BUY, TP: IDR10,471): As a rate cut is viewed as stimulating growth, adding liquidity and lowering NPLs, this should augur well for the banking sector. The market is becoming comfortable with its asset quality as the slowdown in commodities which started in 2011 has led to only a modest increase in NPLs rather than systemic risk. Furthermore, the banks are trading at 1.5x standard deviation below their five-year price-to-forward book mean valuations. Our top pick is Bank Mandiri because of attractive valuations, its diversified portfolio and because it will be a prime beneficiary when infrastructure spending picks up.
Bank Rakyat Indonesia (BBRI IJ, BUY, TP: IDR12,643): To a lesser extent, BRI will also benefit, particularly on the micro-finance side, if growth picks up. Investors still see a lot of potential for micro-finance business, despite rising competition, as the bank is still the best in the space and is making above-average margins.
Bumi Serpong (BSDE IJ, BUY, TP: IDR2,450): As one of the largest landed property developers, it should benefit from an easing monetary cycle as the purchase of landed property is rather dependent on mortgages. Due to its large landbank, the company has flexibility to price its product offerings to suit the market. Balance-sheet strength makes it quite attractive as well.
Gudang Garam (GGRM IJ, BUY, TP: IDR65,000): We expect the company to benefit slightly from local elections and with the overhang from the excise tax now removed, we believe Gudang Garam will continue to perform, especially as valuation is still attractive at 16.7x 2016F EPS – more than a 50% discount to HMSP’s valuation.
Matahari Dept Store (LPPF IJ, BUY, TP: IDR19,000): Improving domestic consumption should bode well for discretionary consumption and the company should benefit from its lucrative target market, large scale and in-depth knowledge of its customers. Valuation is also attractive, trading at its lowest range since its secondary IPO in 2013.
Surya Citra Media (SCMA IJ, BUY, TP: IDR3,450): the company is the prime beneficiary of a recovery in the ad-spend market from the improving domestic economy. It offers everything in one package: good viewership trends, strong balance sheet with negligible FX exposure, solid profitability and reasonable valuations, now at around 10% discount to its own history.
Telkom Indonesia (TLKM IJ, BUY, TP: IDR3,400): Despite being largely seen as a defensive stock, in 2016 Telkom will benefit from the fibre rollout and the potential divestment of its tower business, Mitratel to Tower Bersama (TBIG IJ) as well as the enterprise expansion either directly or via the Telstra-JV. Strong marketing position, growth and financials should assure its outperformance will continue.
Release Date: December 10 2015
NOMURA Global Market Research
Indonesia strategy: Outlook 2016 – Time for the big push