RHB Indonesia Morning Cuppa - 2 November 2016- (ASII, ADHI, ASRI, WSKT, Inflation, ACST, MNCN)

Good morning,

Astra International: Tailwinds To Lift Mining And Agribusiness Segments

We see strong tailwinds for Astra’s mining and agribusiness arms due to:

1. Higher coal prices and slower growth of labour costs for its plantation unit may lift earnings;

2. Hidden value in its property arm (just launched in October) which may be unlocked once its assets start to be monetized;

3. Its auto business is likely to maintain strong sales growth, boosted by lower financing costs.

9M16 earnings were broadly in line, and we expect earnings to recover in4Q16. Maintain BUY, with an SOP-derived TP of IDR9,250 (from IDR9,000, 12% upside).

¨ Strong recovery.We expectAstra International’s (Astra) heavy equipment arm, United Tractors (UNTR IJ, BUY, TP: IDR24,700) to see a strong earnings recovery in FY17 on higher mining contracting volume and fees, increased equipment sales to the mining sector, as well as improved sales of spare parts and coal. Our channel checks indicate the demand for heavy equipment from the coal mining sectoris starting to recover.As it takes around three months from order to delivery, we think this improving demand should begin to be fully reflected in sales numbers in end-2016 or early 2017.

¨ Slower labour costs growth.The surprisingly low increase of the minimum wage for 2017 should boost Astra’s agribusinessAstra Agro Lestari’s (Agri) (AALI IJ, NEUTRAL, TP: IDR17.400) earnings outlook, while its policy to not do any new planting should gradually loosen cash flow. Oil palm plantations is a labour-intensive business, where employee expenses make up ~35% of total operating costs. We consider the Ministry of Manpower’s announcement of a 8.25% increase in the minimum wage for 2017 to be low, vs the double-digit percentage increases over the last five years.

¨ The hidden value of Astra’s property arm may be unlockedonce its assets start to be monetised. Current projects consist ofMenara Astra, a mixed-use complex (office towers, Anandamaya apartments, a shopping centre) located at a premium area in Jakarta’s CBD, and a 70ha township in apromising locationin Cakung, East Jakarta. The outlook for these projects is positive.

¨ Auto’s strong growth likely to continuedriven by lower financing costs – in line with the softened Bank Indonesia benchmark rate.In addition, motorcycle sales are likely to recover, driven by improved consumer spending.The higher prices of commodities such as coal, CPO and coffee should also boost incomes of people outside Java.

¨ Maintain BUY. Our SOP-derived IDR9,250 TP implies a 19x FY17F P/E.The key risks to our call includeweakened consumer spending,theIDR depreciating against the USD andfinance companies’ non-performing loans (NPLs). (Andrey Wijaya)

Link to report: Astra International : Tailwinds To Lift Mining And Agribusiness Segments

Link to Daily report: Indonesia Morning Cuppa - 021116

Company Update:

Adhi Karya (ADHI IJ, BUY, TP: IDR3,150), A Bump In The Path To Glory

We cut our new contracts target to IDR16trn (ex-LRT project)and slash our 2016 earnings estimate, as we expect Adhi Karya’s new contract wins to decelerate. A delay in the LRT Greater Jakarta would negatively impact earnings in FY16F-17F. However, as the stock’s downside risk is limited at its current trading levels, we maintain our BUY call with a lower TP of IDR3,150 (from IDR4,400, 39% upside). Our TP is premised on16x FY17F P/E, its historical 4-year historical forward P/E mean.

¨ Delay in the light rapid transit (LRT) Greater Jakarta project. Given the long delay in the signing of the LRT Greater Jakarta contract, we expect this to negatively impact Adhi Karya Persero’s (Adhi Karya) earnings in FY16-17. Adhi Karya and the Central Government originally planned to sign the contract by the end of 2015. However, we still see uncertainties in the signing of the contact, even though it is merely a paperwork issue. Based on the latest update, the Ministry of Transportation is reviewing the payment scheme for the project. As the Government may use a bridging loan via other financial institutions to finance this project, we expect all LRT issues to be solved and the contract signed by year-end. LRT Greater Jakarta Phase 1 is likely to contribute around IDR20trn to Adhi Karya’s new contracts target this year and up to IDR5trn of 2017F revenue.

¨ New contracts. In 9M16, Adhi Karya recorded IDR11trn (+8.9% YoY) in new contracts, ie only 61.1% of our initial target, below the seasonal 64%.

¨ We cut our new contracts assumption to a conservative IDR16trn (+15.1% YoY) (ex-LRT Greater Jakarta Phase 1). We estimate its FY17F new contracts at c.IDR18trn (+12.5% YoY) excluding LRT Greater Jakarta Phase II which is valued at a potential IDR18trn

¨ Thus, we cut FY16F recurring earnings by 38% to IDR385bn (-10.2% YoY) due to delayed payments from LRT Greater Jakarta Phase 1, slower new contracts won YTD and the kitchen-sinking approach of its engineering, procurement and construction (EPC) unit, which may book a loss of IDR237bn this year.

¨ A better year in FY17. Adhi Karya may likely receive the LRT Greater Jakarta Phase 1 payment (IDR5trn) and see an increase in new contracts next year. We also expect the performance of its EPC unit to improve. Having said that, we estimate its net profit to surge82.2% YoY in FY17, and a wider gross margin of 12.8% which would be supported by higher contributions from precast, transit-oriented development division and fatter construction margins.

¨ Key risks. Prolonged delay of the LRT Greater Jakarta project, slower-than-expected new contract wins and a bigger loss than expected from EPC.

¨ Maintain BUY. We keep our BUY call as Adhi Karya is still the cheaper state-owned contractor in the market, and with strong growth potential due to its LRT project. The stock is trading at11.5x FY16F P/E, ie at almost a 30% discount to the sector average. (Dony Gunawan)

Link to report: : A Bump In The Path To Glory

Alam Sutera (ASRI IJ, BUY, TP: IDR540), Limited Downside Risk

We believe concerns over Alam’s cash flow should further reduce post its strategic tied-up with CFL and its intention to refinance its bonds – this is to lengthen its debt maturity and lower overall funding costs. We fine-tune our numbers with a conservative forecast. A further catalyst would be potential block sales of The Tower, which has IDR2.2trn in potential sales value. The stock’s valuation looks undemanding. The current downside risk should be limited to lower-than-expected presales. We maintain our BUY call and IDR540 TP (23% upside).

¨ Making improvements. Post its cooperation with China Fortune Land Development Co Ltd (CFL) back in June, Alam Sutera Realty (Alam) has successfully issued USD245m in bonds. This is due in 2022 with a coupon rate 6.625%. The net proceeds are to redeem in full its outstanding FY19 bonds with a coupon rate of 9%. We are positive on this exercise, as it:

i. Lengthen Alam’s debt maturity profile (suggesting more time to restore its cash flow), aligned with expectations of a better future outlook for the property sector;

ii. Lowers funding cost from a lower coupon rate – our calculations suggest about 14% savings in interest costs (Figure 1).

¨ Change in forecast. We carry forward the revenue booking to FY17, but keep our conservative forecasts. This suggests core earnings growth of 6.3%/10.2% for FY17F-18F respectively.
¨ Alam’s gearing level is to increase slightly from additional IDR20m in USD notes, but is expected to decline to 0.85x in FY18 (3Q16: 1.02x), in our view. This is aligned with improvements in Alam’s cash flow going forward.

¨ Catalysts in the pipeline. Alam’s YTD presales reached IDR1.3trn, 27% of the FY16 target of IDR4.9trn. Regardless of this, the company is optimistic in meeting this presales target, what with the potential sale of the whole The Tower office block. This project is estimated to generate sales value of IDR2.2trn, ie 57% higher than Alam’s initial target of IDR1.4trn. In addition, the company has potential booked land sales to CFL amounting to IDR700bn-800bn.

¨ Valuation looks undemanding. Alam is currently trading at a 60% discount to RNAV, implying P/Es of 9.9x/9.2x for FY17F-18F respectively. By comparison, the industry is at a 50% discount to RNAV, with P/Esof FY17F-18F of 15.9x/13x respectively.

¨ Note that our forecast is conservative and has yet to take into account the potential block sale of Alam’s office tower. With concerns over the company’s cash flow having been taken care off, the downside risk to our call should be limited to Alam failing to achieve its FY16 presales target. Maintain BUY and IDR540 TP. (Lydia Suwandi)

Link to report: Alam Sutera : Limited Downside Risk

Waskita Karya (WSKT IJ, BUY, TP: IDR3,750), Stellar Performance To Continue

We continue to like Waskita, as it has the strongest earnings visibility among its peers, supported by toll road investments that should prolong its robust performance. The company also has a strong revenue growth outlook that is sustainable for three years. We expect earnings to grow 34.7% YoY in FY17, backed by its toll road projects. We maintain our BUY call on the stock, with a new TP of IDR3,750 (from IDR3,675, 43% upside) based on 23x FY17F P/E.

¨ Strong orderbook. We upgrade our estimate of Waskita Karya Persero’s (Waskita) new contracts to IDR65trn (+103.1% YoY) for this year, on the back of its currently substantial new contract wins. It has signed IDR59trn worth of new contracts YTD, mainly for toll road projects. We also expect Waskita to score IDR40trn in new contracts next year, with contracts worth IDR86trn carried over to 2018. Hence, its total orderbook may reach IDR123trn next year – which may be sufficient to sustain revenue for the next three years. As such, this leads to Waskita having the strongest earnings visibility among its peers.

¨ Sturdy results for 9M16.Waskita’s earnings jumped to IDR935bn (133% YoY) in 9M16, in line with and making up 58%/57% of our/consensus estimates respectively. Revenue surged 89%YoY, supported by strong new contract wins up to 9M16.

¨ Revenue grew 18%QoQ or 72% YoY in 3Q16, while net profit stood at IDR348bn (-24% QoQ, +52%YoY). Its gross margin fell to 15.8% in 3Q16, from 19.3% in 2Q16. We think that Waskita may continue to book a decent performance in 4Q16, supported by toll road projects.

¨ Robust growth. We expect earnings to grow 66.3%/34.7% YoY in FY16/FY17 respectively, backed by toll road projects. Currently, Waskita has 14 toll road projects, with about 12 currently under construction. Furthermore, the company plans to acquire five new toll roads, which should add to its orderbook in 2017.

¨ State-owned infrastructure financing company, Sarana Multi Infrastruktur (SMI) and the national pension fund (PT Taspen Persero) will inject capital via the Waskita Toll Road (WTR) to help the company develop toll roads across the country. Having said that, we expect the company’s cash flow to improve after the cash injection.

¨ Key risks to our call are delays in the land acquisition process, a cut in the Government’s infrastructure budget and tighter cash flow for its toll road operations.

¨ Maintain BUY. We fine-tune our earnings estimates and maintain BUY with a new TP of IDR3,750. Our TP is based on an unchanged FY17F P/E of 23x, +1SD from the industry’s 4-year average rolling forward P/E. (Dony Gunawan)

Link to report: Waskita Karya : Stellar Performance To Continue

Economic HIghlights:

Inflation Continues to Pick Up In October

¨ The headline inflation increasedto3.3% y-o-y in October, up from +3.1%in September, contributed by the faster increase in prices of raw food products and costs of housing & utilities.

¨ Overall, we expect the headline inflation to moderate to 3.4% in 2016, from+6.4% in 2015, on account of low crude oil prices and relatively soft economic growth. For 2017, we expect inflation to pick up slightly to 3.8%, on account of planned electricity tariff hike and a modest pick-up in volatile food prices.

¨ As the inflation will likely continue to be subdued, we expect Bank Indonesia to maintain its loose monetary and macroprudential policy. For the rest of the year, we envisage Bank Indonesia (BI) to retain its policy rate unchanged at the current level. Further out, however, we expect the BI to slash its key policy rate by another 25 basis points in 2017 to support economic growth. (Rizki Fajar)

Link to report: Inflation Continues to Pick Up In October

Results Review:

Acset Indonusa (ACST IJ, BUY, TP: IDR3,900), results below its seasonality

♦ Acset recorded IDR40.1trn (+208.8% YoY) in 9M16’s net profit, accounted for 41%/37.5% to our/consensus estimates, below its 3-year historical seasonality of 48%. Its revenue stood at 1.3trn (+51.4% YoY), or 58%/59%to our/consensus estimates, slightly below its seasonality of 61.5% in 9M.

♦ Around 70% of 9M16’s revenue was coming from upper construction projects, while only 24.5% of revenue was foundation projects. Hence, its gross margin only reached 15.7% in 9M16, below than our expectation of 16% in FY16F.

♦ In quarterly basis, net profit fell -47%QoQ;-6%YoY, while revenue grew -29%QoQ; +16% YoY. It was because of Lebaran allowance in 3Q16 which made EBIT margin dropped to 7.4% from 9.4% in 2Q16.

Outlook
We still maintain our BUY call on this stock with TP of 3,900. We see that 4Q16 results will be better as Kuala Tanjung Jati power plant project will likely to be announced in 4Q16 which will boost Acset’s earnings. (Dony Gunawan)

Media Nusantara (MNCN IJ, Under Review), Slightly below revenue, net profit was offset by forex gain

¨ MNCN booked IDR440.6bn of net profit in 3Q16 (-15.7% QoQ, -17.8% YoY). However 9M16 results show IDR1,442.7bn net profit (+122.1% YoY)

¨ The jump in net margin to 27.4% in 9M16 (+1450 bps YoY) was due to one-off forex gain of IDR207.6bn (from loss of IDR506.9bn in 9M15). If we take out the forex gain (loss) we will have 6.8% YoY growth in core profit or +50.9% YoY in 3Q16, in line.

¨ Revenue recorded at IDR1,695.9bn in 3Q16 (-16.4%, -0.2% YoY), grew relatively flat on 9M16 basis at IDR5,264bn (+4.6% YoY). The result was slightly below our expectation, reflecting 72.2%/73.8% of our/consensus estimates.

¨ Revenue flat growth was due to the shifting of Lebaran as ad expense recorded slower posts the season.

¨ We also expect stronger result as MNC’s prime time audience share is now the highest at 45.1% in September (vs SCMA 23.4%). Strong audience share is supported by its top rated shows such as Anak Jalanan and the new Anugrah Cinta series.

¨ Gross margin was maintained at 56.2% in 9M15 (-70 bps YoY) due to the slight increase in programming cost at IDR2,210.5bn in 9M16 (+6.5% YoY) or 42% to revenue (+70 bps YoY). We expect the cost was higher due to its sport programs, Champions League and English Premier League.

What to expect?

¨ We expect MNC to book higher revenue as a realization of its strong audience share later in 4Q16

¨ Stronger ad expense from FMCG companies is expected in the remaining 2H as consumer brands launches/rebrand products for the holiday season (Kristine Putri)