RHB Indonesia Morning Cuppa - 28 July 2016- (Indonesia Strategy, AALI, ARNA, HMSP, LPPF, WSKT)

Good morning,

Indonesia Strategy: An Opportune Reshuffle

Yesterday’s Cabinet reshuffle will provide a positive surprise to the market, especially with the return of Sri Mulyani Indrawati as the Finance Minister. We believe the Cabinet reshuffle was made:

1. Not just to redistribute ministerial positions to keep political parties that support the government happy but;

2. Also to strengthen the working Cabinet; and

3. To improve ties between government institutions.

We continue to have a positive view on Indonesia’s macroeconomic outlook, and maintain our OVERWEIGHT stance on the overall economy.

¨ Takeaways. Yesterday, the Government announced a Cabinet reshuffle for 14 posts involving three coordinating ministries, 10 ministries and one non-ministerial body. We note three main points on the reshuffle:

i. It had the “grandeur factor” (ie the most buzz), with Sri Mulyani appointed as the Finance Minister (which will lead to a positive surprise for the market);

ii. It makes political parties that support the Government happy, and addresses the need to upgrade the capabilities of the Cabinet;

iii. It is done at the right time, as Indonesia has just entered a new stage by implementing the tax amnesty.

¨ We believe the passing of the tax amnesty implies that the Government is in a stronger position. The current Cabinet reshuffle, which sees representatives of new supporting parties (PAN and Golkar) appointed to certain posts, will also cement an effective government. This is crucial, especially as the country is still on the cusp of major transformation, and positive ties of the bureaucracy and Parliament would be imperative at this stage.

¨ Sri Mulyani is back. With the major changes in economy-related ministries and given Sri Mulyani’s solid track record and experience, we continue to believe that the macroeconomy will improve. Sri Mulyani was appointed as Finance Minister in 2005 by President Susilo Bambang Yudhoyono, and was made the Coordinating Minister of Economy during the 2008 global economic crisis, before she left to become a World Bank managing director in Jun 2010. In several Cabinet reshuffles in the past, it was often rumoured that she would return to be appointed as a minister. Her appointment is a further testament of the changes in the political landscape that supports the Joko Widodo (Jokowi)-led government. She is also seen to be pro-market and would support the market through policies. This will boost confidence in the capital market.

¨ Less discord. We also believe that the reshuffle was made to promote harmony among ministries. In the past, there was often discord between some government institutions. This has sent mixed signals to the public – which could later reduce the public’s confidence in the Government. As we expect the ties between ministries to improve, we also expect for better delivery times for key government projects (which will reduce concerns over execution risks).

¨ Macroeconomic outlook still upbeat. As the economy starts to show signs of recovery, we also expect the reshuffle to lead to the implementation of key government initiatives being sped up. In the short term, we expect household consumption to grow and the improved stability of IDR to support selected sectors. We also anticipate good 1H16 results from companies in the media, consumer, poultry and automotive sectors. Our Top Picks are Astra International, Bank Negara Indonesia, Telekomunikasi Indonesia, Bumi Serpong Damai and Waskita Karya Persero. (Helmy Kristanto)

Link to report: An Opportune Reshuffle

Link to Daily report: Indonesia Morning Cuppa - 280716

Strategy:

Indonesia Outlook- Entering a New Phase

Indonesia’s equity market was supported by an influx of foreign funds, as the JCI has risen by 6.5% since the Government implemented the tax amnesty. Two factors to ensure market movement in the near term:

1. Corporate 1H16 results (a short-term catalyst);

2. The progress of the tax amnesty, seen as more crucial given its impact on the whole economy over the longer term.

We expect the retail, media, consumer, poultry and automotive sectors to report good results, supported by domestic consumption during Lebaran. (Helmy Kristanto)

Link to report: REG_Monthly_20160727

Result Reviews:

Astra Agro Lestari (AALI IJ, Neutral, TP: IDR16,000), Weak FFB Production To Continue In 3Q16

Astra Agro’s FFB production keeps decreasing. While we forecast production to start recovering from October, estimated weak FFB production in 3Q16 may make it continue to book weak core earnings in that quarter. We cut our FY16F-18F earnings by 14.6-0.5% and downgrade our call to NEUTRAL (from Buy), with a IDR16,000 TP (from IDR17,400, 9% upside). We think the share price is exposed to downside risks on an imminent cut in consensus earnings estimates. Our FY16F and FY17F EPS are 17.5% and 11.6% lower respectively than street estimates. (Hariyanto Wijaya CFA CPA)

Link to report: Astra Agro Lestari : Weak FFB Production To Continue In 3Q16

Arwana’s (ARNA IJ, BUY, TP: IDR690)- Lower than expected 2Q16 earning, but expect a restatement in 3Q16

Arwana’s 2Q16 earning declined to IDR22bn (-6.3% QoQ, +69% YoY), achieved at 22%/23% of our/consensus full-year estimates. This was lower than our expectation, driven by lower sales volume . In addition, Arwana still booked its gas costs at old tariff which makes the earning to be under-stated.

We see that 3Q16 revenue should improve, driven by better sales mix from higher UNO sales which has higher selling price and better EBIT margin. Arwana is likely to adjust/restate its income statement with lower gas tariff, after gas-bill received at at lower tariff. Since the new tariff is retroactive to Jan-16, there may be restatement which should lift 3Q16 earning significantly. Maintain BUY with IDR690 TP which implies to 25x/17x FY16/17F P/Es. (Andrey Wijaya)

HM Sampoerna (HMSP IJ, NR)- First Read: 2Q16 results INLINE (52% of FY16F consensus)

¨ 1H16 earnings Inline with consensus expectation (52% of FY).

¨ HMSP booked Improvement in stick sales volume in 2Q16. Unlike GGRM which sales volume decrease in 2Q16, HMSP is able to increase its sales volume in 2Q16

¨ HMSP is able to increase its selling price in 2Q16. Unlike GGRM which not able to increase its selling price in 2Q16 (YTD, GGRM only increase its selling price in Feb’16. GGRM’s accumulated increase in selling price YTD is 2%), HMSP is able to increase its selling price in 2Q16 (HMSP’s accumulated increase in selling price YTD is 6%)

¨ HMSP is traded at FY16F consensus PE of 39.4x

¨ GGRM would publish its financial statement on 29 July. In our earnings preview, we estimate GGRM would book 2Q16F disappointing earnings. (Hariyanto Wijaya CFA CPA)

Matahari Department Store (LPPF, Under Review) continues to release strong 2Q16 performance

¨ 2Q16 net sales saw a jump of 78.2% QoQ and made up 36.8% of our FY16 estimates of IDR10.4trn and 32% of consensus estimates of IDR10.3trn.

¨ The increase is supported by strong SSSG in 2Q16 at 40% due to the shifting Lebaran season that fell on the Q2 instead of Q3. Children’s sector is still the main contributor with increasing Average Unit Retail due to products bundling.

¨ In term of seasonality, MDS still booked a strong performance compared to Lebaran season (Q3) in the past years with 44 days shopping SSSG recorded at 7-7.5%, higher than 2015 Lebaran of 6-6.5%. (Kristine Putri)

Waskita Karya (WSKT IJ, BUY, TP:IDR3,400) recorded IDR571bn core profit

Waskita Karya (WSKT IJ, BUY, TP:IDR3,400) recorded IDR571bn (+240%YoY) in 1H16’s core profit, better than our expected. It was 36.7% and 38.9% to our and consensus FY16F estimates, higher than its 4-year historical average of only 13.8%. This stellar performance was supported by higher gross margin of 18.4% (vs12.1% in 1H15). Its 1H16’s revenue was double compare to last year and accounted for 31.5% to our FY16F estimates, in-line with its seasonality of 30.3%. In QoQ basis, its revenue grew +94%YoY; +63%QoQ, while its core profit was up +185%YoY; +279%QoQ. On the other hand, its new contracts reached IDR45.6trn(+360.5%YoY) in 1H16, 91.2% to our FY16F estimates. We think that Waskita will continue its strong performance in the 2H16 and we still maintain our strong buy on the stock. (Dony Gunawan)

Media Highlights:

Corporates

Indosat and Erajaya to continue expansion

Summarecon plans to renovate its La Piazza shopping mall

Wijaya Karya booked new contracts of IDR16.3trn

Pakuwon’s earning grew by 16.6% YoY

Prepayment of debt, Visi Media Asia to sell 15% of Intermedia Capital’s share

MRT underground construction reached 68%

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