RHB Indonesia Morning Cuppa - 27 October 2016- (Indonesia Strategy, Regional Plantation, Property, BBCA, BTPN, UNVR, TLKM)

Good morning,

Indonesia Strategy: Pro-Growth Policies To Underpin Recovery In 2017

While the recent surprise interest rate cut has failed to attract investor interest – as the market continues to move sideways– we are encouraged by BI’s bias towards growth policies that could underpin a stronger economic recovery in 2017. With the JCI at its current level, most of the positive news seems to be priced in. Recent concerns on low excess liquidity are also fleeting, as seasonally high government spending in 4Q and the inflow from asset repatriation should normalise the situation. Stronger forex reserves may also help provide a cushion for the IDR.

¨ Five factors to focus on. We believe the market is focusing on five factors now. Firstly, 3Q16 corporate results (out by end-October) in which we may see some QoQ moderation in consumer companies’ numbers while the retail sector is likely to book softer top lines. Secondly, excess liquidity, which recently showed signs of deteriorating. Thirdly, aUS Federal Reserve (Fed)rate hike that may lead to volatile currency values. Fourthly, Parliament approving the 2017 State Budget (expected to continue focusing on infrastructure development) by end-October. Fifthly, a possible ratings upgrade by Standard & Poor’s (S&P) on the continuous improvement in Indonesia’s budget and macro-economy. At the JCI’s current level, the market appears to have mostly priced in the recent positive developments, ie the tax amnesty and macroeconomic improvements. The recent interest rate cut also failed to trigger an outperformance. The JCI is still trading within the 5,300-5,450-pt band of late.

¨ Bank Indonesia’s (BI) bias towards growth. BI’s recent unexpected move to cut its 7-day reverse repo (RR) benchmark rate by 25bps to 4.75% is encouraging, as it signals its stance on policies biased towards growth. The timing is impeccable, as the window of opportunity for a rate cut was tightening with the potential Fed rate increase in December. The latter would limit the extent of any cut in Indonesia’s policy rates. We expect BI to maintain its loose monetary and macroeconomic prudential policies, and anticipate it to cut the RR benchmark rate by another 25bps to 4.5% in 2017. As the real adjustment in the banking system ought to take a longer time to materialise, the full impact of the rate cut would only be fleshed out next year. In our view, the rate cut would mainly benefit the automotive, banking and property sectors.

¨ Liquidity issue is temporary. Indonesia continues to show strength in its macroeconomic position. The recent fall in excess liquidity is temporary and not a sign of a deteriorating fiscal position, in our view. Based on BI’s data, excess liquidity fell close to IDR18trn in August-September (1H16:IDR30trn average, 2015: IDR55trn). We think this was mainly driven by accelerating tax penalty payments during Phase I. BI’s government cash reserves increased by 17% MoM to IDR290trn while banks’ deposits growth decelerated. As government spending has entered a seasonal high period in 4Q, the liquidity constraints will likely be relaxed. While the Government engaged in pre-financing activities last year by issuing government bonds earlier to support the State Budget (announced in December), we do not expect it to repeat this strategy this year, as it could further exacerbate the low excess liquidity risk in the system. Also, the tax penalty payment would also provide some buffer to the Government’s infrastructure spending budget.

¨ IDR volatility risk is manageable. The expected higher volatility in forex rates has become a major concern as we move closer to a Fed rate increase. However, several factors may provide a cushion for the IDR, ie Indonesia’s stronger forex reserve of USD115bn, asset repatriation stemming from the tax amnesty that may accelerate in December and a current account surplus that may strengthen on the back of commodity prices recovering somewhat. (Helmy Kristanto)

Link to report: REG_Monthly_Compass_20161026
Link to Daily report: Indonesia Morning Cuppa- 271016

Sector Update:

Regional Plantation (Neutral), Another Disappointment In 4Q16 Output?

CPO prices have rallied of late, likely due to another potential disappointment in 4Q16 output, despite the peak production period. If this pans out, CPO prices could stay at the current high levels for the rest of the year. While we keep our CPO price assumption of MYR2,500 for 2016 and 2017 (YTD: MYR2,560), a continued weakness in output dragging into 1Q17 could mean higher average prices in 2017. As for the upcoming 3Q16 results, we expect six companies to record disappointing earnings, while 10 should be in line. No change to our NEUTRAL sector call.

¨ 2016 global CPO output to fall 5-6% YoY. Indonesia’s CPO output fell 8.5% YoY YTD-August(source: Indonesian Palm Oil Association, GAPKI). This is a further decline from the 5% YoY drop YTD-July. We understand September continued to disappoint, which could result in YTD-Sep CPO output falling by more than 10% YoY. Even with an anticipated strong pickup in output in 4Q, we believe Indonesia may end the year with a decline of 1m tonnes of CPO (-3-4% YoY). We believe that this, together with Malaysia’s estimated 10% YoY decline in CPO output, would lead to global CPO output falling 5-6% in 2016.

¨ 3Q16 earnings should be better QoQ. Despite the lower-than-expected output, we expect 3Q16 earnings to be better QoQ (vs 2Q16), given the higher FFB output QoQ. The average 3Q16 CPO price was MYR2,631/tonne, about 1% higher QoQ, but FFB output for planters under our coverage increased by 7% to 50% QoQ. Going into 4Q, we believe planters’ earnings would likely be the highest for the year, given the anticipated continued FFB output recovery and the current QTD average CPO price of MYR2,710/tonne.

¨ 3Q16 results preview. Among regional planters, we believe there could be some disappointments again resulting from the weak output, to be announced in the upcoming 3Q16 results. The bulk of the results however, are likely to be in line. We expect six companies to record weaker-than-expected earnings due to FFB output disappointment, while 10 companies should be inline (Figure 1).

¨ CPO prices have surprised on the upside in the last few weeks, rising about MYR150-200/tonne. We believe this could be on the back of a rumoured potential disappointment in output in Oct. Should CPO output continue to disappoint in 4Q16, we believe there is room for CPO prices to remain at the current high levels. However, our base case assumption is for a recovery in output in 4Q16 and 2017, resulting in a 10% jump in global CPO output (from the low base in 2016). As such, we keep our 2016-2017 MYR2,500/tonne CPO price assumption for now.

¨ Still NEUTRAL. Our regional Top Pick remains Kuala Lumpur Kepong (KLK) (KLK MK, BUY, TP: MYR26.40). In Singapore, we prefer Golden Agri Resources (Golden Agri) (GGR SP, BUY, TP: SGD0.44); and in Indonesia, London Sumatra (LSIP IJ, BUY, TP: IDR1,800).We also like Sime Darby (SIME MK, BUY, TP: MYR9.25) for the GLC restructuring angle. (Hoe Lee Leng, Hariyanto Wijaya CFA CPA)

Link to report: Another Disappointment In 4Q16 Output?

Property - Key takeaways from Ciputra Analyst Meeting on proposed merger

Key takeaways from the analyst meeting on the proposed merger between Ciputra Property (CTRP), Ciputra Surya (CTRS) into Ciputra development (CTRS).

¨ The conversion ratio is based on share valuation with CTRA, CTRS and CTRP is valued at IDR2,951/share, IDR6,277/share and IDR1,606/share, respectively.

¨ While based on asset valution, CTRA, CTRS and CTRP is valued at IDR3,600/share, IDR9,500/share and IDR2,300/share.

¨ Note that both valuation exclude company’s Joint Operation (JO) projects.

¨ No tax incured on the transfer asset for merger purposes while company advised the other expenses incured on the merger plan is not significant. The expenses include:

i. Tax amnesty - not significant as the transfer is based on book value

ii. Duty on land and building (BPHTB) for land transfer in Surabaya- note that BPHTB in Surabaya is not free unlike in Jakarta

iii. Restructuring fee

¨ Directors from three public listed Ciputra will meet the local and foreign shareholders next week to socialize their proposed merger plan

¨ Update on marketing sales:

i. CTRP has started launch the apartment tower in Ciputra World II, Newton. So far,company has received booking fee of 550 unit out of total 425 unit plan to be launch. The price per unit is between IDR1bn to IDR2bn where company believe it is currently most favorable pricing. If the apetite continue to rise, the company will launch the next tower.

ii. CTRS has booked around IDR1.2trn, coming from two project launch in Medan and Northwest Lake (Surabaya) generating sales value of about IDR150bn and IDR1.047trn, respectively. This should bring the YTD CTRS marketing sales to IDR3trn or almost reached the FY16F target of IDR3.1trn.

iii. CTRA will launch about 1,200 7CitraMaja, as company started to accelerate project targeting the mid-low segments. (Lydia Suwandi)

Results Review:

Bank Central Asia (BBCA IJ, Neutral, TP IDR17,200), Flat QoQ performance

Yesterday, BBCA held an analyst meeting on its 9M16 result. Here below some notes.

Key highlights:

9M16 performance:

¨ Net interest income (NII) represents 77.%/76.5% of our/consensus forecast supported by dropped in interest expenses by 10.7% YoY despite soft loans growth of 5.8% YoY.

¨ Net interest margin (NIM) expanded to 6.9% due to lower blended cost of funds (CoF) to 2% (9M15: 2.4%).

¨ Cost to income ratio (CIR) improved to 44.3% from 44.6% due to a manageable opex growth.

¨ Gross non-performing loans (NPL) ratio rose to 1.5% (Sep-15: 0.7%), coming from its corporate lenders with average ticket size of IDR100-200bn.

¨ Credit costrose to108bps,while BBCA’s management does not give detail guidance on its credit cost.

¨ Net profit of IDR15.1trn accounted for 74%/76.6% of our/consensus forecast.

3Q16 performance:

¨ NII was relatively flat compared to previous quarter given softer loan demand in 3Q16 as most of the working capital loan were repaid by the borrowers, particularly with front loading production pre-Ramadhan and Lebaran in 2Q16.

¨ Blended CoF continue to fall to 1.9% in 3Q16 on the back of 78% CASA deposits contribution to total customer deposits(June: 76.3%).

What to expect:

¨ Loan growth would start to pick up in FY17 at 14% as we anticipate BBCA’s management would continue to focus on improving its assets quality until 1Q17.

¨ Asset yield would continue to fall due to lower loan yield coming from higher corporate lending exposure. We expect lower asset yield at 7.9% in FY17 (FY16: 8.2%).

¨ NIM would fall to 5.7% for FY17 (FY16: 5.9%) in our forecast mostly coming from lower asset yields projection.

¨ We expect gross NPLs ratio would improve to 1.1% by end of year then further fall to 1% by end-2017 with improvement also in credit cost from 89bps this year to 84bps as BBCA would focus towards corporate lending and consumer lending (particularly mortgage) which require lower credit cost. (Eka Savitri)

Bank Tabungan Pensiunan Nasional (BTPN IJ, Neutral, TP IDR2,900) - Higher NIMs due to lower blended CoF

Yesterday BTPN released its 9M16 result following analyst meeting. Using yesterday’s closing price, BTPN trades at 2017F P/BV multiple of 0.95x (-1.25SD of its historical mean).

Key highlights:

9M16 performance:

¨ Net interest income represents 78.8%/76.8% of our/consensus forecast supported by much lower interest expenses.

¨ Net interest margin (NIM) expanded to 11.9% due to lower blended cost of funds (CoF) of 7.3% (9M15: 8.4%).

¨ Cost to income ratio (CIR) rose to 62% from 59.5% due to its continued investment in new business units (BTPN Wow! and Jenius).

¨ Gross non-performing loans (NPL) ratio stable at 0.8% (Sep-15: 0.8%), reflecting its prudent risk management policies.

¨ Credit cost remain under control at 137bps, below BTPN’s management guidance of 150-170bps.

¨ Net profit of IDR1.4trn accounted for 84.2%/78.2% of our/consensus forecast.

3Q16 performance:

¨ Net interest income up by 2.2% QoQ coming from lower interest expenses.

¨ NIM stable at 12.2% compare to previous quarter while blended CoF dropped to 6.8% in 3Q16(2Q16: 7%).

¨ Credit cost dropped to 116bps as its loan portfolio remain manageable with gross NPLs of 0.8% and loan loss coverage (LLC) ratio of 122.7%.

¨ With lower interest expenses as well as provisions, net profit grew by 21.2% QoQ.

What we miss:

¨ Higher than expected blended CoF of 7.7% in FY16 as 9M16’s interest expenses only accounted for 67.1% of our FY16 projection.

What to expect:

¨ Loan growth would start to pick up in FY17 at a more moderate figure of 13.9% as we anticipate micro lending would deliberately fall as BTPN’s management still in the progress to revamp its micro business model.

¨ Asset yield would continue to fall due to rebalanced loan mixture with high growth coming from iSME loan which offer lower loan yield. We expect lower asset yield at 17.4% in FY17 (FY16: 18.2%).

¨ NIM would decline to 10.7% for FY17 (FY16: 10.9%) in our forecast mostly coming from lower asset yields projection. So our model suggest more upside risks on the NIMs side that may come from lower blended CoF.

¨ Asset quality should not be the main issue for BTPN given its long track record on managing its prudent risk management policy.

¨ Our key concern is the high growth in opex to build its new business units in branchless banking platform, BTPN Wow! for mass market segment and Jenius for mass affluent market segment. Yet we anticipate the impact from these two platforms would help its customer deposits structure significantly by end-2017 at the soonest in our view (TD contributed 87% of total customer deposits as at September). (Eka Savitri)

Unilever Indonesia (UNVR IJ, Neutral, TP: IDR48,500), Being Ready For Future Growth

In anticipation of better consumer spending, Unilever has almost doubled its capex spending to increase HPC production capacity and purchase more ice cream cabinets. It also relocated its office as it needed more space. Unilever is cutting opex too by reducing advertising costs and booking more online advertisements. However, given the counter’s rich valuation, we maintain our NEUTRAL call and DCF-based IDR48,500 TP (9% upside), which implies 52x FY17F P/E.

¨ Capex doubled as it anticipates better demand. Anticipating better consumer spending next year, Unilever Indonesia (Unilever) has almost doubled its 9M16 capex spending to IDR1,260bn (+43% YoY). The disbursements were for:

i. An increase in home personal care(HPC) production capacity;

ii. The purchase of more ice cream cabinets to expand distribution;

iii. The relocation to an office in a new area to meet larger space needs.

Better consumer spending ahead should boost Unilever’s sales volume and provide more room to adjust selling prices to offset higher production costs.

¨ Improved operating cost efficiencies. The firm is reducing its opex/unit, driven by a lower number of stock keeping units (SKUs) and more online marketing campaigns. In the last five years, Unilever has reduced SKU numbers by 20% and we see more SKUs reduction going forward. The firm’s low-cost online advertising strategy should improve EBIT margins too. So far, its advertising & promotions (A&P) expenses-to-sales ratio has declined to 11% in 9M16 (9M15: 12%).

3Q16 earnings: in line

¨ 3Q16 performance in line, reiterate NEUTRAL. Unilever’s 3Q16earnings reached IDR1.5trn, or74% of our full-year estimates. Lower QoQ net profit was driven by cyclically low sales in 3Q, ie after the Lebaran festivities. Given its rich valuation, we maintain our NEUTRAL recommendation and DCF-based TP of IDR48,500 (9% upside). This implies 52x FY17F P/E. (Andrey Wijaya)

Link to report: Unilever Indonesia : Being Ready For Future Growth

Telkom (TLKM IJ) 9MFY16 Results Flash- The legacy continues. Maintain BUY TP: IDR5,000

9MFY16 results were slightly ahead of street estimate, at 78% and over 80% of our forecast on stronger than expected EBITDA. Revenue, EBITDA and core earnings sustained its strong double-digit growth in 3Q16/YTD, partly aided by seasonality (related to Lebaran) and the strong data growth with continued expansion of legacy revenues at 65%-owned mobile unit, Telkomsel.

We are keeping our BUY rating with unchanged DCF TP of IDR5,000 (WACC: 10.7%, TG: 1.5%). Telkom continues to be our top pick for Indonesian telcos and one of our preferred Asean-4 telecom picks given its commendable track record of earnings and operaitonal execution coupled with superior ROEs/balance sheet. Further updates post the results call slated for 1 Nov.

Other highlights

¨ Strong EBITDA growth was attributed to the 13% QoQ decline in operational and maintenance cost on good cost initiatives and the fall in interconnect charges (OTT cannibalisation).

¨ Subs addition of 6.3m in 3Q16 was the strongest quarterly addition since FY12, reflecting Telkomsel’s solid brand franchise/commercial execution and network investments.

¨ Mobile voice revenue growth acccelerated to 12.1% YoY/QoQ in 3Q16 from 8.5% in 1HFY16 from on-going migration to voice combo packages and the relatively high base of 2G handset customers still (outside of Java).

¨ Voice revenue per min (RPM) surged 13% YoY to IDR186, the second consecutive quarter of double digit expansion. Similarly, revenue per SMS (RPSM) expanded 9% YoY in 3Q16 to IDR75.

¨ Strong mobile traffic growth of 85% YTD more than offset the continued erosion in data yield, driving mobile internet revenue growth of 41% YTD (3Q16 : +31% YoY). This came on the back of higher smartphone adoption (47% of base in 3Q16) and migration to bundled packages.

¨ We expect the structural pressure on data yield to persist as the operators aggressively push 4G uptake with higher data allowances. 4G base is still a fraction of overall subs at less than 10%.

¨ Indi-Home- its triple play service saw subs flatlined at 1.5m as it opted to churn out low quality subs and focus on higher yielding customers. (Jeffrey Tan)

Media Highlights:

Economics

Indonesia climbs 15 places to rank 91st in World Bank's ease of doing business

Indonesia parliament approved 2017 budget with 2.41% deficit

Corporates

Astra's new business pillar

Astra International officially launched new business pillar, property. Earning from property will be reported as a new division on 9M16 financial statement's segmental breakdown. Current Astra's property projects are Menara Astra and 70ha land in East Jakarta.

Three years ago, Astra started the development of Menara Astra - a multiple complex building (apartment, office, shopping centre) - at premium area in Jakarta CBD. Menara Astra estimated project value is IDR8trn.

In Sep-16, Astra signed a JV agreement with Modernland Realty. The JV Company is to buy 70ha land in East Jakarta with est. value IDR3.5trn.

We see positive outlook on the above Astra property projects since they are located in 1) strategic and premium area (Menara Astra), as well as 2) promising location (land in East Jakarta).

Maintain BUY with DCF base TP of IDR9,000 (10% upside). (Andrey Wijaya)

Waskita to receive IDR15trn from SMI and Pension Fund

Waskita Karya (WSKT IJ, BUY, TP: IDR3,675) is set to receive IDR15trn capital injection from Sarana Multi Infrastruktur (SMI) and SOE’s Pension Fund. The Minister of National Development Planning stated that the capital injection will be used as Waskita’s initial capital. The financial closing is targeted to be finished by next month (November). (Detik)

Comment: the fund will be given to Waskita Karya Toll Road (WTR) to finance toll road projects across the country. Having said that, we see that company’s cashflow will be healthier after the proceeds. (Dony Gunawan)

Catur Sentosa indicative 3Q15: 9% YoY growth, slowing

Chandra Asri 9M16’s net profits jumped by 601% YoY

Krakatau Steel eyes IDR6.5trn revenue from tower for transmission projects

Modernland Realty sold 3.7ha of land to IKEA

Total aiming IDR4trn new contracts for 2017

Our Recent Publication:

Results Review: Bank Rakyat Indonesia : Micro Lending To Support Further Growth Ahead

Link to report: Bank Rakyat Indonesia : Micro Lending To Support Further Growth Ahead

Results Review: Bank Tabungan Negara : Better Days Ahead

Link to report: Bank Tabungan Negara : Better Days Ahead

Sector update: Construction: Lower Execution Risk Underpins Positive Outlook

Link to report: Lower Execution Risk Underpins Positive Outlook