RHB Indonesia Morning Cuppa - 29 July 2016- (Unilever, ACST, ASII, GGRM, LPCK, SMRA, TLKM, UNTR)

Good morning,

Unilever Indonesia: Better Outlook In 2H16

Unilever’s earnings are likely to accelerate in 2H16, given the improvement in consumer spending. It is also cutting operational expenses by reducing advertising costs and booking more online advertisements. Its robust 2Q16 earnings (+10% QoQ, +29% YoY) were driven by a wider home personal care (HPC) unit’s EBIT margin, as well as lower financing costs. Rolling over our valuation to FY17F’s cash flow, we lift our DCF-based TP to IDR48,500 (from IDR42,500, 4% upside), implying 52x FY17F P/E. Given its rich valuation, we maintain NEUTRAL.

¨ Likely better 2H16 earnings. In 2H, we expect Unilever Indonesia’s (Unilever) sales to accelerate on improved consumer spending – driven by higher commodity prices as well as increased government spending on infrastructure projects which have a multiplier effect to Indonesians’ income levels. To prepare for this uplift, Unilever is strengthening its brands – in both its HPC and food & refreshment divisions.

¨ The company just launched its “AXElerate: The Series” website to increase its share of the male deodorant market. Online advertising is a good strategy to boost sales, as it captures the attention of a youthful population which will make up its customer base in the future. Online advertising also has lower costs than advertising on television. In time, Unilever’s online marketing campaign should improve its EBIT margin. So far, it has lowered its advertising & promotions expenses-to-sales ratio to 10.9% in 1H16 (from 12% in 1H15).

¨ Robust 2Q16. Although it did not raise selling prices, its 2Q16 earnings grew 10% QoQ or 29% YoY to IDR1.7trn, at 51% of our and consensus full-year estimates. The improvement was driven by:

i. Higher sales volumes;

ii. A wider EBIT margin;

iii. Lower financing costs.

¨ The appreciation of IDR against USD also lowered production costs, since around 45% of costs are in USD terms. In addition, the lower advertising expenses also boosted earnings.

¨ The robust 2Q16 performance was also driven by lower net financing costs, in which its net interest expenses declined to IDR22bn in 2Q16 (-46% QoQ), from IDR41bn. Notably, Unilever was in a net cash position of IDR1.1trn at end-June, vsnet debt of IDR22bn at end-March.

¨ Still NEUTRAL. After rolling over our valuation to FY17F’s cashflow, we raise our DCF-based TP to IDR48,500 (from IDR42,500, 4% upside), implying 52x FY17F P/E, ie near +2SD from its 5-year average rolling forward P/E. Unilever is trading at 50x FY17F P/E. Given its rich valuation, we remain NEUTRAL on the stock. Main risks to our call are slower-than-expected economic growth and rising competition in the food & refreshment space. (Andrey Wijaya)

Link to report: Unilever Indonesia : Better Outlook In 2H16

Link to Daily report: Indonesia Morning Cuppa - 290716

Result Reviews:

Acset Indonusa (ACST IJ, BUY, TP: IDR4,550), 2Q16 first read

♦ Acset Indonusa (ACST IJ, BUY, TP: IDR4,550) recorded IDR32.8bn (+527.1% YoY) in 1H16’s net profit, 26.0% and 27.0% to our and consensus FY16F estimates. It was below than its seasonality of 31.7% and lower than our expectation due to project delay.

♦ Its revenue grew +70.9%YoY or 43% to our and consensus FY16F estimates, in-line with seasonality.

♦ In QoQ basis, its revenue grew +103%YoY; +6%QoQ, while its net profit reached IDR13.6trn (-30%QoQ;+297%YoY).

♦ Its 2Q16’s gross margin stood at only15.1%, lower than 16.0% in 1Q16 due to higher contribution from upper construction work.

Outlook:
♦ We think Acset will post better quarterly results in 3Q since Acset will receive several projects payment in 3Q16.
♦ We think interest expense will be slowing down in following quarters after right issue process in 2Q16. (Dony Gunawan)

Astra International (ASII IJ, BUY, TP: IDR8,500)- Astra‘s 2Q16 earning robustly grew 29% QoQ

QoQ base, 2Q16 earning rose 29% QoQ to IDR4trn, driven by higher earnings from auto and mining contractor. Astra’s 2Q16 car wholesale increased a robust 14.9% QoQ, as well as mining contracting volume rose 8% QoQ. However, YoY base, 1H16 earning declined to IDR7trn (-12% YoY), achieved merely 42% of our/consensus full-year estimates. This was below expectation, driven by lower finance unit earnings, due to higher non-performing loan of Bank Permata.

We expect 2H16 earnings likely to accelerate which is driven by higher earning from auto – which accounted for 54% of Astra consolidated earning, on the back of:

1. The new budget-MPV Toyota Calya launch;

2. LTV relaxation for vehicle financing, likely to be effective in 3Q16;

3. Lower financing cost.

Given expected better 3Q16 earning, we maintain BUY with SOP-based IDR8,500 TP (14% upside) implying19x FY17F P/E. (Andrey Wijaya)

Gudang Garam (GGRM IJ) (First Read): 1H16 earnings is BELOW CONSENSUS expectation (42% of FY)

Inline with our earnings preview, Gudang Garam’s 1H16 earnings is BELOW CONSENSUS expectation (42% of FY). Average proportion 1H to FY earnings in the last 4 years is 47.8% of FY.

The main reasons of below expected 2Q16 earnings are:

1. GGRM is unable to increase its selling price in 2Q16. Unlike HMSP which able to increase its selling price in 2Q16 (HMSP’s accumulated increase in selling price in 6M16 is 6%), GGRM did not able to increase its selling price in 2Q16 (GGRM only increase its selling price in Feb’16. GGRM’s accumulated increase in selling price in 6M16 is 2%),

2. Lower sales volume in 2Q16. Currently, Consensus still think that GGRM’s sales volume increase in 2Q16. Unlike HMSP which able to increase its sales volume in 2Q16, GGRM sales volume decrease in 2Q16.

GGRM is traded at 19.1x FY16F consensus EPS. (Hariyanto Wijaya CFA CPA)

Lippo Cikarang (LPCK IJ, BUY, TP 14,300) –Delay is the culprit

¨ LPCK’s 2Q16 net profit drop 41% QoQ to IDR132bn, due to slower revenue booking in 2Q16 of IDR323bn (-41% QoQ)

¨ We believe the slower revenue booking is owing to delay in finalizing the tender of contractor for Orange County project

¨ Fixed operational cost while lower contribution from higher yield margin, industrial land sales also resulting weak earnings in 2Q16. Note that 2Q16 earnings accounts for 39/37% of ours/consensus’ estimates.

¨ Nonetheless, company balance sheet remain strong with company kept its zero debt position.

¨ As appointing the main contractor might face another delay, potential downside risk would be downgrade in ours and consensus’ estimates.

¨ Amid all, we expect improvement in property sector also industrial estate sector, from imposed tax amnesty coupled with positive sentiment from welcoming back the new ministry of Finance, Sri Mulyani, who has strong track record and experience in strengthening the Indonesia’s economy and increasing direct investment in Indonesia

¨ The counter is currently trade at 5.8-5.1x PE for FY16/17F and at hefty 73% discount to company’s RNAV of IDR28,472/share. Maintain BUY. (Lydia Suwandi)

Summarecon Agung (SMRA IJ, SELL, TP1,480)- Potential Further Downgrade

SMRA’s earnings continue to drop with 1H16 net profit only achieved IDR25bn, 3% of our and consensus’ estimates.

As we have expected, amid better revenue recognition in 2Q16 (+21% QoQ ) to IDR1.3trn, FY16 earnings will still be dragged by:

i) Apartment-heavy sales mix would limit SMRA’s GPM growth. Note revenue recognition from apartment sales will be strecthed to 4 years.

ii) Higher interest cost from higher debt. Note interest expense in 2Q16 is IDR167.3bn (+19%QoQ) on the back of additional IDR819bn of debt during the quarter.

Additionally, we might see earnings to be dragged further from higher operating cost as the result of its new township launch in Karawang, Summarecon Emerald.

As such, we expect SMRA’s FY16 earnings to be dissapointing with potential further downgrade by consensus, following bad 2Q16 results. Maintain SELL, TP 1,480. (Lydia Suwandi)

Telekomunikasi Indonesia (TLKM IJ, BUY, TP: Under Review), 2Q16 Results: Another Good Run

We maintain our BUY rating with TP under review pending the results call scheduled for 2 Aug. Telkom remains our top IND telco pick and one of our top ASEAN 4 picks, predicated on : i) the superior growth profile and balance sheet strength and ii) solid commercial execution. The stock remains a net beneficiary of the governments’ tax amnesty program (7% weighting on the JCI – the largest among the listed IND telcos).

Key Highlights:

Telkom

¨ 1H16 core earnings beat estimates at 58%/55% of our/consensus nos. respectively, underpinned by robust double- digit growth in revenue/EBITDA/core earnings

¨ 2Q16 core earnings of IDR5.4trn (+31% YoY; +15% QoQ) brought 1H16 core earnings to IDR10trn (+25% YoY)

¨ 2Q16 topline of IDR28.9trn (+15% YoY; 5% QoQ), topped our earlier expectation of 12% YoY growth, mainly fueled by data, internet & IT services which soared by over 50% YoY

¨ 2Q16 EBITDA fell by 3.5% QoQ to 48.9% on higher operating/maintenance (+15% YoY), and marketing cost (+22% YoY)

Telkomsel

¨ Telkomsel’s 1QFY16 revenue grew 3.5% QoQ (+15% YoY), partly driven by seasonality (Lebaran led promotions)

¨ Mobile internet/data revenue growth momentum remained strong , up 46% YoY (1HFY16: +47% YoY), led by higher smartphone penetration and data adoption.

¨ Voice revenue rose 8% YoY/6% QoQ on higher Revenue per minute (RPM) of IDR169 (+17% QoQ) while SMS revenue fell 2.3% QoQ on lower SMS revenue/unit which slipped 2% QoQ

¨ Telkomsel’s subs grew 3% QoQ to 157mn (net adds of 3.8mn)

Other key operational metrics

¨ Data yield narrowed 13% QoQ to IDR32/MB, reflecting the migration of pay per use to data bundled plans and 4G promotions. The YoY contraction in data yield has nonetheless slowed in recent quarters

¨ 5.9m mobile subs on 4G SIM vs 3.1mn in 1Q16 which translates into a 4G penetration of 4%.

Fixed broadband triple play business (Indihome) saw its customer base inched higher to 1.5mn (from 1.35mn in 1Q16) on the back of 10mn premises passed (David Hartono)

United Tractors (UNTR IJ, SELL, TP: IDR11,800), 1H16 results INLINE with our and consensus expectation

United Tractors’s 1H16 results INLINE with our and consensus (47.9%/46.2% of our/consensus FY16F)

¨ 2Q16 reported earnings increase by 53.7% QoQ mainly due to:

o the increase in earnings from mining contracting business, which were driven by: 1) seasonal higher mining contracting volume in 2Q (vs 1Q). 2) higher mining contracting’s profit margin in 2Q because lower production cost per unit as a result ofhigher mining contracting volume in 2Q16 (vs 1Q16)

o Lower forex loss in 2Q16 (vs 1Q16)

¨ Outlook for 2H16F:

o Mining contracting fee has been fixed for mining contracting volume throughout 2016. Recent recovery in coal price should not improve mining contracting fee in 2H16F.

o The trend of strengthening Rupiah against USD as a result of sizable USD inflow from tax amnesty may squeeze profit margin in 2H16F

¨ At this moment we maintain our Sell call with TP:IDR11,800. We will roll-forward our valuation to 2017 numbers. (Hariyanto Wijaya CFA CPA)

Media Highlights:

Corporates

Bank Mandiri aims to lower gross NPL to 3.7% at year end

Bank Mandiri (BMRI IJ, Neutral, IDR10,100) recently set a slightly lower gross NPL from 3.86% to 3.7% at year end. The bank stated that it see the negative impacts of weakened global commodity prices and slower economic growth that resulted in loan repayment difficulties by its customers. Moreover, Bank Mandiri raised its provisions for bad loans to IDR18trn until the end of this year or +63.6% compared t last year’s provision. (Jakarta Globe)

Comments: Such 3.7% NPL target for end-2016’s position is far above management’s initial target of 3.0% set in beginning of the year. Moreover, with lower loan growth target of 10-12% we still view that Mandiri in a challenging position to manage its assets quality, particularly in commercial loan segment (NPL by June-2016: 6.7% vs March-2016: 4.4%). (Eka Savitri)

Residential market dropped 13.3% in 2Q16

The residential property market in Jabodetabek and Banten area recorded a drop by 13% QoQ in 2Q16. The data from Indonesia Property Watch (IPW) stated that the value of residential market only reached IDR1.08trn or -49.82% YoY. However, IPW stated that the dropped is due to the festivities that happened in 2Q16 including Lebaran and school holiday. The highest growth is recorded in Bekasi by 45% QoQ, Depok 12.3% and Tangerang 11.9%.(Investor Daily)

Comments: We expect better presales activities in 2H16 backed by the passing of tax amnesty that should revitalise buyer’s willingness who held back their property purchasing due to tax audits. Developers also advise that they are getting ready to launch more products in 2H16. As for our coverage universe, we are targeting IDR29.4trn presales value for FY16 (+6% YoY) with 1H16 presales has reached around 40% of our estimated FY16 target.(Lydia Suwandi)

Intiland to launch 2 new projects

Hero booked net profit of IDR19.09bn in 1H16

MatahariMall.com ex Jakarta transaction increased by 1,241%

Puradelta booked net profit of IDR486.4bn in 1H16

Ramayana to continue expansion in Java

Indonesia new Transportation Minister to review priority projects

Our Recent Publication:

Strategy: Indonesia: An Opportune Reshuffle

Link to report: An Opportune Reshuffle

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

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