Good morning,
Indonesia Strategy:
Direct Impact on Brexit is mild
Indonesia's
economy is mostly driven by domestic consumption, we believe the Brexit issue
should not have considerable impact to the Indonesia long term economic growth.
While Indonesia direct trade to Euro zone is not significant in our view, the
potential risk would mainly comes from greater volatility of the IDR. The
imminent passage of tax amnesty could serve as mitigating factor, which will
strengthened Indonesia budget stability, securing funding for infra spending.
♦ The Brexit impact on
two main channels
The preposterous decision of UK to leave Euro
Zone has sent across a state of turmoil globally. The “Brexit” is expected to
affect Indonesia economy from two main channels. The first will likely be
through the financial and currency markets. We will likely see a sell-down
in global financial markets and weakness in Pound sterling, Euro, and emerging
countries’ currencies, including Indonesia. Hence, Rupiah will likely to
depreciate against USD. The second is via trade and investment not just
from UK but Europe as a whole. Worst case, if Brexit were to trigger domino
effect, it may drag down global economic growth and send Indonesia economy to
slow down just like the case in 2008-09 US subprime credit crisis. During that
period, Indonesia’s growth slowed to 4.6% in 2009, from +6.0% in 2008.
In our view, the Brexit impact should not
derail Indonesia long term economy growth trajectory, mainly due to:
1.Indonesia greater dependency toward domestic consumption, which accounts for
55% of GDP, 2. Overall net export only accounts for less than 2% and 3.
Indonesia direct trade to Euro Zone is not significant. The share of
Indonesia’s direct exports to UK are small around 1.0% and to Europe, the share
is higher at 11.4% in 2015. Indonesia’s exports to the UK consist mainly of
footwear, apparel, and wood articles. The bulk of Indonesia exports to EU is to
Netherlands (23%), Germany (18%), and Italy (13%) and the main products are raw
materials and unrefined goods.
In terms of foreign direct investment (FDI),
Indonesia recorded a net outflow of FDI from UK and Europe of USD0.2bn and
USD1.1bn, respectively. From 2010-2014, the share of FDI from UK has averaged
only around 6.8% of the total while FDI from Europe, except in 2011, mostly
recorded an outflow or less than 2% of total FDI. Based on our estimate, for
every 1% drop in Europe’s economic growth, Indonesia’s exports will likely be
down by 1.0% and the economic growth will be negatively impacted by 0.1-0.2%.
♦ Indirect impact: IDR
weakening
While virtually corporate under our coverage
has no exposure to this region,the potential indirect risk would be on IDR
depreciation. On this aspect,sector/company that will be negatively impacted
would be: 1. Consumer and healthcare sector given their large raw material
importation. Within consumer, retailers (MAPI IJ and ACES IJ) would have more
risk than the staples (ICBP IJ, INDF IJ and UNVR IJ), while pharmaceutical
(KLBF IJ) would be more affected than hospitals (MIKA IJ, SILO IJ). 2. Sector
with high USD debt exposure such as telcos (ISAT IJ and EXCL IJ), tower (TBIG
IJ and TOWR IJ) and media (MNCN IJ). On the contrary, the exporters (AALI IJ
and LSIP IJ) and USD earners (UNTR IJ) could benefit from these ST IDR
weakening, although the former could still see risk on weakening palm oil
price. With Brexit, there could be further delay in the Fed rate hikes which
would open up more possibility for Bank Indonesia to further cut interest rate.
On this respect, property and banks sector will be the most positively impacted.
♦ Imminent tax amnesty
approval
After months of deliberation in the
parliament, the new tax amnesty law is likely to get green light on the next
General Assembly (28 June) especially after the working committee consisting of
parliament members and government officials approved the critical details of
the proposal on Friday, which include, among others, the penalty of 2 to 10%
for asset repatriation/declaration. In our view, the passage of tax amnesty
will undoubtedly strengthened Indonesia's budget situation, which currently
under the pressure of increasing budget deficit on below than target government
revenue. We believe this would serve as solid catalyst for market in general,
which would bring restore confidence back to Indonesian government, and lure
foreign inflow to Indonesia. Infra and property sector would be the direct
beneficiary of the approval of tax amnesty.
♦ Defensive stock
preferred
In the short term, we advise for add
position in defensive stock with strong management quality such as TLKM IJ
and BBCA IJ. We also like property counter (BSDE IJ and CTRA IJ) and construction
(ADHI IJ and WSKT IJ) on tax amnesty approval. Over the medium to longer term,
there should not be any considerable change on Indonesia economy growth path
which will focus on the development of infrastructure. (Helmy Kristanto)
Comments on Brexit
impact on the sectors:
♦ Automotive
Although
Brexit may indirectly slower consumer spending recovery, we believe that
domestic auto sales recovery to progress,driven lower interest rate which
should reduce financing costs, as well as potential relaxation on vehicles
financing LTV. However, manufacturing costs may increase if IDR depreciate
against USD although IDR exchange rate is still relatively stable post Brexit
results announcement. Maintain BUY on Astra International.
♦ Banking
Minimal
impact from brexit on Indonesian banks as banks already limit forex exposure in
their balance sheet since three years ago. Recent major off-shore borrowings in
Mandiri (BMRI IJ, neutral, TP IDR10,100), BRI (BBRI IJ, buy, TP IDR12,900) and
BNI (BBNI IJ, buy, TP IDR6,200) obtained from CDB (China Development Banks) for
infra projects has a minor contribution of its respective funding mix (less
than 10%).
♦ Consumer
As
commodity resources income country, Indonesia consumer spending is likely to be
indirectly hurt by potential weakening demand on commodity product, which could
pose a risk on CPO price. Manufacturing cost may increase if IDR weakened
against USD since around 60% costs are related to USD. However, its impact is
merely short-term. Within consumers, the retailers will have more risk on
further IDR weakening. Indofood Sukses remains as our top pick.
♦ Construction
We
believe Brexit has insignificant impact to Indonesia construction sector as
companies usually sign an agreement with the raw material suppliers to lock raw
material prices before they start the project. Thus, contractors will not
suffer from volatility in currency.
♦ Cement
No
direct impact to cement sector, given its small export portion. Cement sales
may weaken further, but this is mainly driven by domestic factors such as soft
consumer spending. In our view, overcapacity on the cement production capacity
is still the key risks. Cement companies is likely to further lower its selling
price to protect market share which will force EBIT margin to compress. We see
this overcapacity situation to continue in 2017. We reiterate Neutral on the
sectorwith Semen Indonesia as our top pick.
♦ Media
There
will be a minimum impact on the Brexit towards Media sector in Indonesia.
According to our economist, there will be an impact on the Indonesia currency
in the short term after the Brexit. We view that, Media Nusantara Citra (MNCN
IJ, BUY, TP:IDR2,300) will have an impact as the company has USD250mn debt. In
the short term, we could see the higher forex loss. Meanwhile, there is no
impact to the Surya Citra Media (SCMA IJ, NEUTRAL, TP:IDR3,300) – as the
company has no USD debt and minimal cost of programs in USD.
♦ Property
We
see the impact of brexit to Indonesia property sector is INSIGNIFICANT. The
indirect impact on IDR weakening will negatively affecting companies with large
exposure to USD bond, like ASRI and LPKR. But so far, IDR has been quite resilient
and stable post Brexit announcement.
Recent
positive news from BI rate cut and LTV relaxation probably would mitigate the
negative sentiment on Brexit, and we believe that the current weak share price
should be seen as buying opportunity, given: i) near term catalyst from
passiing of tax amnesty bill. ii) less possibility for fed rate cut which might
provided room for further BI rate cut
We
expect better 2H16 presales performance, with 1H16 presales might achieved
around 30-35% of the total FY16 presales target. However, we expect significant
recovery be more visible in 2017.
Amid
the recent relaxation measure, we still focus on company's balance sheet and
cash flow. we also favor landed residential than high rise given tendency of
Indonesia's prefered type of property. Great landbank and vast projects
portfolios (locations) should also our top picks criteria which we skewed to
Bumi Serpong Damai (BSDE IJ, BUY, TP 2,540) and Ciputra Development (CTRA IJ,
BUY, TP1,540).
♦ Tower
In our view, there is
no direct impact from the Brexit towards Tower sector in Indonesia. The
indirect impact will negatively impact the company who has a USD debt exposure,
c. Tower Bersama Infrastructure (TBIG IJ, NEUTRAL, IDR6,450). There will be a
mixed impact towards Brexit; as we view that the Indonesia rupiah will shoot up
in the short term. The company revenue will improve in the short term due to
their USD contract with Indosat (ISAT IJ, NEUTRAL, TP: IDR5,650). On the other
hands, there is no significant impact to the Sarana Menara Nusantara (TOWR IJ,
BUY, TP: IDR4,700).
♦ Transportation
No
significant impact to the transportation sector in Indoensia. The companies
under our coverage have a minimum impact to USD and there is no cost that
related to USD. Blue Bird (BIRD IJ, BUY, TP:IDR7,500) has no USD debt in their
balance sheet and no USD cost exposure. While, Express Transindo Utama (TAXI
IJ, NEUTRAL, TP: IDR200) also has a minimum USD debt exposure with no USD cost
related.
(Indonesia Research team)
|
Media Highlights:
|
|
Economics
Indonesia increase
defense spending despite budget cut
Micro credit
disbursement reach IDR51trn
Corporates
AKR Corporindo
targets to sell 60ha of JIIPE Industrial land
Bank Mandiri to open
4 new branches in Kalimantan
Malindo aims 15%
revenue growth in 2016
Pembangunan
Perumahan to invest IDR400bn for its toll road business
Indomobil allocates
FY16F capex of IDR1.2trn
Trada Maritime ready
to sell its fleet
Automotive export
volume slightly decreased
Fuel Consumption to
jump 50% before Idul Fitri celebration
|
Best regards,
Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia
