RHB Indonesia Morning Cuppa - 22 August 2016 - (Indofood CBP, Pembangunan Perumahan, BI Rate)

Good morning,

Indofood CBP: Earnings Likely To Improve In 2H16

We expect Indofood CBP’s earnings to improve in 2H16, driven by:

1. Consumer spending growth, ie better noodles and dairy product sales;

2. Lower input costs (especially flour) lifting earnings of its noodles unit;

3. Lower operating losses from its beverage segment.

2Q16 earnings came above expectations. We lift our FY17F-18F earnings by 9-7%, respectively. Rolling over our valuation to FY17F (based on cashflow), we raise our DCF-based TP to IDR10,200 (from IDR8,400, 13% upside), implying 27x/21x FY17F-18F P/Es. Maintain BUY.

♦ More premium noodle and dairy products. We think consumer spending is likely to grow in 2H16, driven by more stable inflation as well as an improvement in the income levels of Indonesians – especially those outside Java islands – on the back of higher coal and CPO prices, which are among their main income sources. Given this expected improvement, by mid-2Q16, Indofood CBP (Indofood) started launching new premium products, ie Indomie Real Meat, Chitato Foodie snacks, banana-flavoured dairy Indomilk, and coconut water Coco Bit. According to Indofood, sales of these premium packaged foods are strong and are growing faster than that of ordinary Indofood products. Thus, we are more optimistic on its sales outlook.

♦ Input costs likely to decline. In August, the average price of flour (a raw material to make noodles) declined by 3%. Since noodles accounted for 65% of 1H16 sales and flour contributed around 30% of production costs, lower flour prices are likely to reduce Indofood’s production costs significantly. In addition, a strengthening IDR should further lower costs since around 70% production costs are directly and indirectly related to USD, while sales are mostly in IDR terms. On the flip side, based on our calculation, the average selling price (ASP) of its noodle products increased 6% YTD. Lower input costs and a higher ASP should boost the company’s gross profit margin.

♦ Positive development on beverages. After Indofood shifted the duties of distributing and marketing beverages to its own distribution unit (vs a third party previously), we expect its beverage sales to increase significantly as it should find it easier to identify potential markets (which would lead to higher sales). Management indicated that the demand for its Club mineral water – which has improved packaging with a polyethylene terephthalate (PET) bottle – is high. However, its sales were capped by a shortage in PET bottle supply. Indofood plans to increase the production capacity of its Club mineral water.

♦ BUY, with an upgraded TP. We raised our FY17F-18F earnings by 9-7%, respectively, driven by higher-than-expected dairy earnings. Indofood raised its earning guidance on FY16F EBIT, thanks to its robust 1H16 earnings that were above our and consensus expectations, at 56% of our/consensus full-year estimates. We also raise our DCF-based TP to TP to IDR10,200 (from IDR8,400, 13% upside), implying 27x/21x FY17F-18F P/Es. (Andrey Wijaya)

Link to report: Indofood CBP : Earnings Likely To Improve In 2H16

Link to Daily report: Indonesia Morning Cuppa - 220816

Results Review:

Pembangunan Perumahan (PTPP IJ, BUY, TP: IDR5,400), in-line with our indication in our previous report

♦ PTPP’s 1H16 net profit stood at IDR355.3trn (+100% YoY), 38% to our and consensus FY estimates. It was above its 5-year historical average of 25%.

♦ PTPP saw its revenue grew 24%YoY in 1H16. It was 33% to our and consensus FY estimates, in-line with its 5-year average of 32%.

♦ Gross margin was expanded to 14% in 1H16, from previously only 13.1% in 1H16 due to all the business pillars are generating profit.

♦ In quarterly basis, its 2Q16 net profit grew 161%QoQ; 282%YoY, while its revenue grew 50%QoQ; 20%YoY. Hence, its net margin stood at 6.6%, higher than its 1Q16 margin of 3.8%.

We now opine that PTPP will continue its strong performance, supported by several on-going and upcoming infrastructure projects. (Dony Gunawan)

Link to previous report: Pembangunan Perumahan Persero : A Heavenly Outlook

Economic Highlights:

BI Mantains The BI 7-day Reverse Repo Rate at 5.25% But Cut Lending Facility Rate to 6.00%

¨ Bank Indonesia (BI) board of governors’ meeting decided to maintain the BI 7-day Reverse Repo (RR) rate, the benchmark policy, at 5.25% on 19^th August 2016. Similarly, deposit facility rate was also maintained at 4.50% but the lending rate was cut by 100 bps to 6.0%. As mentioned in April 2016, a change in the benchmark rate from the BI rate to 7-day RR rate is aimed at improving monetary transmission’s effectiveness. In addition, the BI will also keep a more symmetrical and narrow interest rate corridor, the lower (Deposit Facility) and upper ceiling (Lending Facility), at 75 bps each below and above the BI 7-Day RR rate. The decision was made given that inflation remains low, the current account deficit is still manageable and the currency is relatively stable. Furthermore, BI believes that by maintaining the country’s macroeconomic stability, rooms for monetary easing remains open.

¨ Elsewhere, the BI on 19^thAugust 2016 said that it will also continue to coordinate with the government to prepare anticipative policy measures that ensure implementation of the Tax Amnesty will go smoothly and support government’s fiscal adjustment efforts.

¨ Separately, the BI lowered its projected economic growth for 2016 to a range of 4.9-5.3% from previous projection of a range of 5.0–5.4%. BI foresees the economic prospects will remain in a good shape but not ruling out a further state budget cut in 2H could potentially undermine growth this year. Nevertheless, we are still of the view that easing inflation, recent government deregulation, the implementation of the tax amnesty bill, and BI’s monetary easing will likely boost consumption, export, and private investment in the later part of this year. In addition, the prices of several commodities from Indonesia are rising, specifically coal, tin and crude palm oil (CPO) that could support rural household spending.

¨ On the global economic outlook, the BI acknowledged that growing uncertainty after Brexit may result in moderate economic growth in Europe and global economy. Meanwhile, despite indications of gains in consumption and improvements in labour sector, the US weak investment data in 2Q suggests that it is still beset with uncertainty and Fed rate hike is expected only once in late 2016.

¨ Indonesian financial system remained stable, underpinned by a resilient banking system and relatively sound financial markets. At the end of 2Q 2016, the Capital Adequacy Ratio (CAR) of banks remained high at 22.3%, which is above the minimum threshold of 8%. At the same time, non-performing loans (NPL) remained relatively stable at 3.1% (gross) or 1.5% (net). Credit growth was faster at 8.9% y-o-y at the end of 2Q, up from +8.7% in the previous quarter, while deposit growth moderated to 5.9% y-o-y at the end of 2Q 2016.

¨ Going forward, we believe inflation will likely ease in 2H 2016 and inflation rate will be lower for the full-year due to lower fuel prices and relatively soft domestic demand. In addition, the current account deficit in 2016 will likely be manageable. Furthermore, the deluge of foreign capital inflows and lower foreign exchange demand in the domestic market will likely continue to provide a support to the rupiah, as expectations on the US raising interest rates abate. This will likely provide room for the BI to loosen its monetary policy further. In 2H 2016, we expect another cut in the 7-Day RR rate by 25bps given that BI mentioned there is still a need for additional easing to stimulate growth. (Rizki Fajar)

Link to report: BI Mantains The BI 7-day Reverse Repo Rate at 5.25% But Cut Lending Facility Rate to 6.00%

Media Highlights:

Economics

Bank Indonesia revised economic growth projection to 4.9% YoY

Corporates

Soechi Lines received USD180m loan

Soechi Lines (SOCI IJ, BUY, TP: IDR650) recently received USD180m of syndicated loan from several banks lead by Standard Chartered and Bank Mandiri as the mandated lead arranger and book runner. The proceeds from the loan will be used for refinancing and capex for the company and its subsidiary. (Kontan)

Comment: Around US$ 130 million of the proceeds will be used for loan refinancing. The remaining of around US$ 50 million will be for capital expenditure. After the refinancing, the Company’s loan composition would change from 75% foreign currency loans and 25% rupiah loans to become 100% US$ loan. (Norman Choong)

Mitra Adi Perkasa paid IDR18.13bn coupon

Wika Beton to enter transportation infrastructure business

Jababeka received IDR3.3trn marketing sales from Kendal

Krakatau Steel to build its second hot strip mill

Medco Energi International to build USD500m smelter

PP Properti to cooperate with Crown Group

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