May Monthly Report Digest Risks Prudently NHKS Monthly Report (English)

  May 2018

  NH Korindo Research Indonesia Market

Digest Risks Prudently

• – Ou2H17

Summary:

  In April, Indonesia’s financial market, including Indonesia’s stock market tumbled ignited by the global sentiment. The

  U.S. Treasury yield topping 3% caused the Indonesia government bonds yield to stood at 7% and JCI to tumble more than 4%. On the other side, the depreciated rupiah nearing at 14,000 had Bank Indonesia to open the possibility of raising its benchmark rate. Ahead of May, we estimate that investors’ appetite is likely reign in sluggish mood. It is important that investors will not be drowned in flood of overwhelming concerns stemming from this backdrop. We estimate BI to leave its benchmark rate unchanged in 2018 in light of the better macroeconomic backdrop. Besides,

JCI’s attractive valuation after its tumble in April curbed its further declining risks

  We recommend that in May 2018, investors focus on the poultry and retail sectors estimated to better off amid the recovery in retail sales ahead of Ramadhan and Eid Mubarak. Charoen Pokphand Indonesia (CPIN) from the poultry sector, Mitra Adiperkasa (MAPI), and Ace Hardware (ACES) from the retail sector are top pick stocks investors need to consider in May 2018.

Indonesia’s Bonds Yield Settling at 7% Again BI’s Intervention in Rupiah

  

Questions on Raising Benchmark Rates

Recovery in Fundamental Factors

Risks on Further Limited Decline in JCI Indonesia’s Bonds Yield Settling at 7% Again

• The global financial market turmoil marked by the U.S. Treasury yield topping 3% caused the Indonesia government bonds to soar higher than 7% the last-one-year highest level. On April 25, the Indonesia government bonds was at 7.21% soaring by 64 bps only within 8 days when the U.S. Treasury yield gradually p assed the psychology limit of 3%.
• The volatility of Indonesia’s bonds market caused by 40% foreign ownership of Indonesia’s government bonds likely ignites further higher yield. Investors need to digest the Indonesian government premium yield against the U.S. Treasury yield with a view to anticipating the worst risks. Now, the Indonesian government premium yield stands at the average of 4.2%-4.4% similar to its position from August to December 2017 in which the global markets were anticipating the hike of Fed Rate of December 2017. In light of this backdrop, investors are capable of anticipating the worst risk of yield near at 7.5%.

  Government Bond Yield (%) Indonesia Yield Premium over U.S. Treasury (%) BI’s Intervention in Rupiah

• In the end of April, rupiah was depreciated. From the early of March to the fortnight of April rupiah moved stably at the average of 13,700-13,800 stopping its significant depreciation as of the early of 2018. Its early 2018 depreciation worsened its position from 13,300-13,400 into 13,700-13,800. In the end of April, its depreciation slightly shifted its position from 13,700-13,800 into 13,800-13,900. However, rupiah near to the psychology limit of 14,000 cause a way more overwhelming concerns than its early 2018 depreciation.
• The crucial factor curbing current rupiah movement is the massive intervention by Bank Indonesia (BI) committed to maintain its exchange rate amid the massive capital outflow. Had BI not intervened the rupiah depreciation in the end of April, rupiah’s exchange rate against dollar would be higher than 14,000. BI’s current intervention

  supported by the larger amount of forex will be capable of cushioning the further significant decline similar to the 2015 ’s backdrop.

  USDIDR Monthly Forex Reserve and Currency Questions on Raising Benchmark Rate

• The rupiah exchange rate near to 14,000 is inextricably linked to the possibility of the higher interest rate by Bank Indonesia (BI). Investors expect that BI will not only intervene the financial markets but also raise its benchmark rate. However, we estimate that BI likely leaves its interest rate unchanged at 4.25% in 2018. We oversee

  that there are factors differentiating the current BI’s intervention to its 2013’s rate hike.

• The currently low inflation is the logical takeaway for BI to leave its benchmark rates unchanged. Now, the inflation is still well maintained at the average of 2.5%-4.5% which is BI’s inflation target. In 2013, the inflation settling at 8.0% underscoring the mandatory for the hike in interest rates.
• On the other side, the growth in credit is not yet satisfied albeit BI’s massive interest rates cuts. To maintain the trend of recovery in credit, BI likely raise its benchmark rate only if any extreme backdrop occurs.

  Indonesia Inflation (%) Credit Growth & Non Performing Loan Recovery in Fundamental Factors

• Apart from the jitters of financial markets, the Indonesia’s macroeconomic backdrop consistently improves. From the trade balance outlook, after suffering from the trade deficit from December 2017 to February 2018, Indonesia, in March 2018, succeeded to post trade surplus backed by the raising export performance even though the global markets face the headwind of the trade war between the U.S. and China. The trade surplus of March are estimated to continue further along with the recovery in the global demand.
• From the retail outlook, the Indonesia-based retail sales grew by 1.5% and 1.7% in February and March 2018 in contrast to the retail sales of January 2018 declining by 1.8%. We estimate that the momentum of upbeat retail sales in the next couple of months will continue further. The stable inflation is supported a number of factors, such as Ramadhan and Eid Mubarak to occur in May and June, unchanged petroleum and electricity prices underpinning the growth in retail sales.

  Trade Balance (USD mn) Retail Sales Risks on Further Limited Decline in JCI

• In April 2018, JCI tumbled by 4.4% hitting to the psychology limit, a lower-than-6,000 level. The dramatic tumble in JCI was ignited by the tumble in big cap stocks

  such as banking and consumers stocks mostly owned by foreign investors. On the other side, the basic industry sector rallied in April as it was underpinned by the animal feeds stocks.

• The massive decline in JCI positioned JCI’s forward P/E valuation to lower than the average of forward P/E at 15.3x. In light of the trend of JCI’s valuation as of 2015, the forward P/E is at -1 SD at the minimum. Thus, it is estimated that the risks of further decline in JCI is quite limited. In light of the recovery in investors’ appetite consuming time, we estimate that JCI in the end of 2018 likely only settles at the forward P./E of 15.3x. Based on the estimate, we target JCI to settle at 6,425 in the en d of 2018.

  JCI Performance in April 2018 JCI’s Forward P/E

  

Poultry: Charoen Pokphand Indonesia (CPIN)

Retailers: Mitra Adiperkasa (MAPI), Ace Hardware (ACES) Charoen Pokphand Indonesia (CPIN) - Poultry

• A Glance at CPIN

  Dec 2018 TP 4,200

  CPIN has main business activities engaging in feed mill industry; chicken breeding and cultivation, processed Consensus Price 3,497 chicken meat, chicken meat preservation; and cold storage units. It has 8 animal feed mills situated in

  TP to Consensus Price +20.1% Banten, East Java, North Sumatera, Central Java, South Sulawesi, and West Java. Besides, it also has 5 vs. Last Price +14.1% chicken meat processing mills located in Banten, Central Java, North Sumatera, and East Java.

  Last Price (IDR) 3,680

  Price date as of Apr 27, 2018 Based on the consolidated sales, the biggest contribution stems from the animal feeds followed by the

  52wk range (Hi/Lo) 3,530/ 2,660 broiler, the day old chick (DOC), and the processed chicken. CPIN persistently paves a way for dominating

  Free Float (%)

  44.2 the markets for the animal feeds, DOC, processed chicken with the market share of 31%, 38%, and 66%

  Outstanding sh. (mn) 16,398 respectively. Market Cap (IDR bn) 60,673 Market Cap (USD mn) 4,374

• Upbeat Soybean Prices

  Avg. Trd Vol

  5.76

• – 3M (mn)

  CPIN dominates 31% of the animal-feed market shares in Indonesia. The domination allows it to pass on Avg. Trd Val

  20.15

• – 3M (bn)

  the cost arising from the upbeat raw material to consumers as the global soybean prices surge by 4.7% in Foreign Ownership 9.0%

  1Q18. These qualities enable CPIN to post the upswing in sales boosted by the surging selling prices and

  Sales Breakdown: stable margin.

  Animal Feed 47% Broiler Chicken 28% Others

  25%

  Share Price Performance Soybean Price 2017 vs 2018

  IDR bn FY2016 FY2017 FY2018E FY2019E Sales

  38,257 49,367 51,766 57,293

  y-y 27.1% 29.0% 4.9% 10.7%

  EBITDA 5,200 4,538 5,114 5,629

  Net profit 2,221 2,498 2,946 3,349

  EPS (IDR) 135 152 180 204

  y-y 20.9% 12.5% 17.9% 13.7%

  NPM

  5.8% 5.1% 5.7% 5.8%

  ROE

  16.6% 16.7% 17.7% 17.9%

  P/E 22.8x 24.0x 20.3x 17.9x

  Mitra Adiperkasa (MAPI) - Retail

• A Glance at MAPI

  Dec 2018 TP 9,450

  MAPI as one of retailers in Indonesia boasts of its ample branded portfolios — more-than 150 globally

  Consensus Price 9,091 marketed brands. Founded in 1995, it initially focused only on sports products. Now, it establishes

  TP to Consensus Price +4.0% well-nurtured business in a vast lines of sports products, fashion, department stores, food & beverages, kids’ vs. Last Price +15.2% products, lifestyle targeted to the middle

• – high income individual. Not only does MAPI run its business in

  Last Price (IDR) 8,200

  Indonesia but it also expands its markets in neighboring countries: Singapore, Malaysia, Thailand, Australia, Price date as of Apr 27, 2018 etc.

  52wk range (Hi/Lo) 8,325 / 5,625 Free Float (%)

  46.0

• Strategy for Thriving in 2018

  Outstanding sh. (mn) 1,660 It wittingly avails the event of 2018 Asian Games to further its goal of maximum sales in sports stores. Market Cap (IDR bn) 13,197

  Besides, it makes benefit Eid Mubarak momentum to boost the sales of fashion and department stores Market Cap (USD mn) 951 segments. In the food & beverage segment, it targets the growth of 20% by launching 70 new stores.

  Avg. Trd Vol

  1.27

• – 3M (mn) Avg. Trd Val

  9.6

• – 3M (bn)
• A Way More Specialized than Its Peers

  Foreign Ownership 24.2% MAPI sales performance in 2017 showed the stable purchasing power of middle to high class income

  Revenue Breakdown:

  individuals in facing economic conditions. Besides, the preference of the middle to high class income Retail Sales 70.2% individuals to conventional shopping causes MAPI to be quite strong in facing headwind of e-commerce

  Department Stores 16.7% business. Indeed, it likely develops further the omni channel to hike sales of e-commerce segment. Others

  13.1%

  Share Price Performance Quarterly Revenue (IDR bn)

  IDR bn FY2016 FY2017 FY2018E FY2019E

  Revenue 14,150 16,306 18,447 20,483

  y-y 10.3% 15.2% 13.1% 13.0%

  EBITDA 1,512 1,803 2,051 2,385 Net profit 209 335 478 617 EPS (IDR) 126 202 289 373

  y-y 460.0% 60.5% 42.9% 29.0%

  NPM 1.5% 2.1% 2.6% 3.0% ROE 6.8% 9.0% 10.9% 12.8% P/E 42.8x 30.6x 27.3x 21.2x

  Ace Hardware (ACES)

• – Home Improvement Retailer
• A Glance at ACES

  Dec 2018 TP 1,575

  ACES is a retailer dominating home-improvement business in Indonesia. Its sold products whose are Consensus Price 1,472 categorized into home improvement and lifestyle segments. Targeting the middle to high income individuals,

  TP to Consensus Price +7.0% it operates 144 stores across big cities in Indonesia. vs. Last Price +26.0%

  Last Price (IDR) 1,250

• Impressive Sales Figures in 2017

  Price date as of Apr 27, 2018 ACES posted the upswing of 20.3% y-y in 2017

  ’s net sales coupled by picking up sales in its overall 52wk range (Hi/Lo) 1,410 / 910 segments. Another to 17-store launch in 2017, the success in merchandising and marketing strategies

  Free Float (%)

  40.0 beefing up sales in new stores and mature stores. Likewise, it also successfully decreased the number of

  Outstanding sh. (mn) 17,150 days in inventory from 216 days in 3Q17 into 202 days in 4Q17. Indeed, it was capable of posting cash of

  Market Cap (IDR bn) 21,866 IDR902 billion despite aggressive business expansion it carried on. Market Cap (USD mn) 1,576 Avg. Trd Vol

  7.5

• – 3M (mn)
• 1Q18 Performance Growth

  Avg. Trd Val

  10.0

• – 3M (bn)

  Its improving performance continued further until 1Q18 as it successfully posted the sales and profit Foreign Ownership 28.0% attributed to its parent entity of IDR1.55 trillion (+21.0% y-y) and IDR208.9 billion (+35.5% y-y) respectively.

  Sales Breakdown:

  Home Improvement 55.7% Lifestyle 40.3%

  Share Price Performance Quarterly Sales (IDR bn)

  IDR bn FY2016 FY2017E FY2018E FY2019E

  Net Sales 4,936 5,939 6,490 7,097

  y-y 4.1% 20.3% 9.3% 9.4%

  EBITDA 953 1,044 1,169 1,250 Net profit 711 778 901 973 EPS (IDR)

  41

  45

  53

  57

  y-y 20.8% 9.4% 15.8% 7.9%

  NPM 14.4% 13.1% 13.9% 13.7% ROE 25.0% 23.7% 23.7% 22.1% P/E 20.1x 25.5x 23.8x 22.0x

  Thank You

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