RHB Indonesia - Retail - Tailwinds Trump Headwinds - (Retail, Strategy, Bank Tabungan Negara, Bank Mandiri) Unknown Kamis, 16 Februari 2017


Good morning,

Retail - Tailwinds Trump Headwinds

We see stronger signs of improvement in consumer demand and expect the trend to continue, supported by better commodity prices, lower interest rates, and more investment inflows. In addition, rationalised expansion over the last few years should help retailers’ margins, in our view. As such, we believe retailers in general would do well this year. We reinitiate coverage on the sector with OVERWEIGHT. In particular, we like turnaround efforts at Mitra and Ramayana. Key risks include political instability and currency volatility that could prolong the recovery process.

¨ Demand side: Gradual improvement along with economic recovery. We believe consumer confidence is key in supporting private sector spending, and we see the positive momentum potentially being boosted further by improving commodity prices in the near term, and more investment inflows in the longer term. As such, we expect retailers’ topline to grow at high single-digit to low double-digit levels in 2017F, from mid- to high single-digit growth rates in 2016.
¨ Supply side: Rationalised expansion lowers pricing pressure. We think retailers’ margins should be underpinned by rationalised expansion and improved inventory levels. Retailers’ expansion over the past two years has been generally slower than previous years’, thanks to slower property completion and the weaker market. Retailers’ inventory positions have also generally improved, with some retailers already at comfortable inventory levels. We believe these conditions have eased pricing pressure and provided some upside to margins.
¨ Online shopping a promising market in the longer term, but obstacles continue to drag the full unleashing of its potential in the near term. Rising income and a young population are long term key growth drivers, in our view. On the flipside, short term obstacles such as relatively high costs of good internet access and mobile devices, drag online shopping adoption. The online shopping format is set to grow as more Indonesians come online, and purchasing power grows. We believe this trend would have a disproportionately negative impact on Matahari Department Store (Matahari) as incremental online shoppers are likely to come from Matahari’s target market segments, in our opinion.
¨ Tailwinds trump headwinds. Overall, we expect profit acceleration in 2017-2018F, stemming from gradual topline growth, GP margin recovery, operating leverage as well as financial leverage. We forecast average topline growth of 10-11% in 2017-2018F, a slight improvement from previous years, supported by higher commodity prices and rising confidence level. We expect margin recovery as rationalised expansion and economic recovery gain pace. Politics and currency stability are macro wild cards, though we remain optimistic.
¨ We like turnaround efforts at Mitra and Ramayana. Ideally, an investment case should be made on a company that is heading towards the fourth quadrant in Figure 1, or at least one that is pushing its asset turnover towards the first quadrant, or improving its profitability/margin towards the third quadrant. Ramayana Lestari Sentosa (Ramayana) and Mitra Adiperkasa (Mitra) are our Top Picks with relatively faster asset turnover growth and stronger margin improvements, a combination that would ultimately increase profitability. Both companies have undertaken business and management turnarounds, which were timed well with the improvement in general economic conditions. (Stifanus Sulistyo)

Link to report: to be sent out later
Link to Daily report: Indonesia Morning Cuppa - 160217

Strategy:

Indonesia: Jakarta election is going into the second round
The 101 election events all across Indonesia yesterday went smoothly with the overall situation remains stable and conducive with no major incidents reported. The focus has been fixated on the Jakarta governor election which is believed to have strong influential to dictate the political landscape for the 2019 presidential election. With more than 7m eligible voters in Jakarta, the participation rate is higher when compared to 2012 election of 65-68%, according to the Jakarta General Commission Election (KPU). It is reported that short of ballot paper occurred in several pooling stations.
With the formal results announcement by KPU will only be released on early March, various institutions have released the quick count results off the Jakarta election.Quick countis a method for verification of election results based on sampling of the actual vote, and is perceived to be more reliable than exit pool.
Based on quick counts results, the Jakarta Governor election will need to go into the second round, as there's no candidate can secured the required winning rate of 50% + 1 vote in the first round.The incubent Jakarta Governor Basuki Purnama (Ahok) and his deputy Djarot Saiful Hidayat won the first round, securing43%of vote, still below the required winning rate. Anies Baswedan-Sandiaga Uno came second with 39.6% of vote. In our view,considerably low number of votes of Agus Yudhoyono-Sylviana Murni (17.36 percent) came as asurprise, despite various poll have been showing his lower popularity trend weeks prior to the election date.

We believe the two rounds election situation have largely been anticipated by the market, including the incumbent's success going into the second round.As the incumbent winning would ensure the continuity of the current reform-minded government, its winning is perceived to be market friendly. To win in the second round, the incumbent would need to perform impeccably, continues to executing his policy in Jakarta which is believed to be his main strength. Any controversial statement from the incumbent would led to irrevocable momentum loss prior to the second round of election, which will be held on the 19 April.Heightened political tension risk will remains as the major concern, in our view, which would limit market performance in the ST.We believe theIndonesia remains to offer value proposition on LT basis, driven by lower interest rate environment and reform-oriented government stimulus policies.Infra project will continue to go ahead, whoever wins the Jakarta election in our view. Our recent overseas marketing trip reveals that investors are still positive on Indonesia prospects, and are now looking the right time to re-enter. (Helmy Kristanto)
Results Review:

Bank Tabungan Negara (BBTN IJ, BUY, TP: IDR2,420), More Good Years Ahead
We expect BTN to generate a higher loans volume going forward, driven by its focus on the low income mortgage segment and stable credit cost. Subsidised mortgages should continue to support its loan book expansion, as the Government is allocating a total of IDR15.2trn from its 2017 state budget. With substantial mortgage exposure, BTN’s credit cost should be stable at 63bps this year, based on our model. Maintain BUY and GGM-based IDR2,420 TP (23% upside).
¨ Higher volume, better business outlook. We expect Bank Tabungan Negara’s (BTN) higher loans volume in 2017 to come mainly from its subsidised mortgages segment. Non-subsidised mortgages would be another growth engine – given BTN’s niche market in the low income segment (ie mortgage sizes of IDR200m). This year, the Government has already set aside a total budget of IDR15.2trn for subsidised housing, which is divided into the:
i. IDR9.7trn housing finance liquidity facility (FLPP) scheme;
ii. IDR3.7trn interest rate subsidy scheme;
iii. IDR2.2trn down payment subsidy.
Currently BTN is using the interest rate subsidy scheme for subsidised mortgages, while waiting for the Government’s decision on the funding percentage for the 2017 FLPP scheme.
¨ Stable credit cost. BTN’s December NPLs improved to 2.8%, far exceeding our expectation of 3.1%. As such, 2016 earnings beat our forecast, due to a much lower credit cost of 46.7bps (2015: 62.9bps). Given BTN’s strategy to maintain mortgages as its core business, credit costs should remain manageable at 63bps in this year, resulting in a decent LLC ratio of 47.9% by end-2017F.
¨ Maintain BUY. We maintain our BUY call and GGM-derived IDR2,420 TP. Our key assumptions are CoE of 12.2%, ROE of 14% and long term growth of 3%. Our TP is based on 2017F P/BV of 1.2x, which is below its 7-year average P/BV of 1.3x.
¨ Risks. Short-term risks to our forecasts include a delay in the 2017 FLPP scheme and limited supply of subsidised housing. (Eka Savitri)




Bank Mandiri (BMRI IJ, Neutral, TP IDR11,600), Continue to focus on asset quality improvement
On last Tuesday Mandiri held an analyst meeting on its FY16 result. Using today’s closing price, Mandiri trades at 2017F P/BV multiple of 1.5x (-1SD of its historical mean).

Key highlights:

FY16 performance:
¨ Net interest income represents 106%/104% of our/consensus forecast supported by 11.2% YoY loans growth.
¨ Net interest margin (NIM) expanded to 6.2% due to a lower blended CoF of 3.2% (FY15: 3.7%).
¨ Cost to income ratio (CIR) improved to 42% from 42.8% due to a manageable opex growth.
¨ Gross non-performing loans (NPL) ratio rose to 4% (end-15: 2.6%).
¨ Credit cost hover at 392bps, far above Mandiri’s management guidance of maximum 320bps.
¨ Net profit of IDR13.8trn accounted for 78%/86% of our/consensus forecast.

4Q16 performance:
¨ Net interest income up by 2% QoQ.
¨ Blended CoF slightly fall by 10bps to 3.4% in 4Q16.
¨ Credit cost of 543bps as Mandiri’s management aims to building up its loan loss coverage (LLC) ratio at its comfortable level of above 120%.
¨ All in, net profit fell by 63.4% QoQ.

What we miss:
¨ Higher than expected credit cost of 392bps in FY16 as the pressure in asset quality reflected through 4% gross NPL ratio (vs 3.5% of our expectation). Such figure is above Mandiri’s management guidance of 280-320bps for FY16.

What to expect:
¨ Loan growth would start to pick up in FY17 at 12.4% as we anticipate Mandiri’s management would continue to focus on improving its assets quality until 1Q17 at the soonest.
¨ Asset yield would continue to fall due to lower loan yield coming from higher corporate lending exposure. We expect lower asset yield at 8.4% in FY17 (FY16: 9.1%).
¨ NIM would fall to 5.7% for FY17 (FY16’s reported NIM: 6.4%) in our forecast mostly coming from lower asset yields projection.
¨ We expect gross NPLs ratio would improve with lower credit cost as Mandiri would focus towards corporate lending which require lower credit cost compared to commercial and SME lending. (Eka Savitri)

Media Highlights:

Corporates

Waskita recorded 64% YoY increase in FY16’s net profit
Wasktita Karya’s (WSKT IJ, BUY, TP: IDR3,750) net profit reached IDR1.714trn (+64% YoY), 104.6%/106.0% to our /consensus estimates, backed by lower interest expense than we expected. Its revenue only stood at IDR23.8trn, 90.1%/96.6% to our/consensus estimates as some toll road projects were pushed to this year. Its FY16’s GM was at 16.7% (our estimate: 16.3%) , supported by high GM in 2Q16 of 19.3%. The management aims IDR3.5trn net profit this year, 58.6% above our estimates, propped up by up to five toll road investments in FY17F. (Dony Gunawan)

Wijaya Karya Beton FY16’s net profits surged 56.7% YoY
Wijaya Karya Beton (WTON IJ, BUY, TP: IDR1,070) obtained IDR272.4bn (+56.7% YoY) in FY16’s net profit, 109.4%/96.0% to our and consensus estimates due to higher gross margin in 4Q16 of 16%.Its FY16’s revenue reached IDR3.5trn, in-line with our estimates, but slightly below consensus. GM level stood at 14.5% in FY16, above our estimates of only 13.2%. Maintain BUY on the stock. (Dony Gunawan)

Nippon Indosari strengthen its modern trade distribution
On phone call with Nippon management, the company mentioned that Nippon Indosari will sell its Sari Roti products through 155 Seven Eleven outlets starting tomorrow (17-Feb). In the past, Nippon also used Seven Eleven distribution, but they terminated distribution agreement in 2014. Now, Nippon has better collection payment of 2 weeks (instead of 4 weeks in the past). We see this new distribution will strengthen Nippon existence in modern trade channel. Maintain BUY on the counter. (Andrey Wijaya)
Bank Mandiri is optimistic FY17’s net profit to surge by 44% YoY
Malindo Feedmill to boost capital expenditure by 30% YoY in 2017
Semen Indonesia sold 2.18m tonnes of cement in January 2017
Telekomunikasi Indonesia successfully launched 3S satelite
Pembangunan Perumahan eyes IDR21trn investment in 2017
Elnusa’s FY16 performance stumbles
Nusa Konstruksi Enjiniring targets IDR2.5trn in new contracts
Our Recent Publication:
Results Review: Bank Tabungan Negara: More Good Years Ahead
Economic Update: CAD Improves In 4Q, BOP Surplus Continues
Sector Update: Regional Plantation - Last Round Of El Nino Impact for Malaysia
Sector News Flash: Regional Oil & Gas - One Of The Deepest Cuts In The History Of OPEC
Sector News Flash: Regional Oil & Gas - Production Cut Rollover a Possibility
Economics updates: Inflation On An Upward Trend But Is Still Manageable
Reinitiating Coverage: Mitra Adiperkasa - Sharp Recovery Ahead
Reinitiating Coverage: ACE Hardware - Weighed Down By Challenges
Reinitiating Coverage: Matahari Department Store - No More Leverage


Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia
DID: (6221) 2970 7056
Fax: (6221) 2783 0777

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