RHB Indonesia - BI Holds Key Policy Rate In March (Aneka Gas Industry, Bank Rakyat Indonesia) Unknown Jumat, 17 Maret 2017


Good morning,
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BI Holds Key Policy Rate In March

BI’s board of governors held the BI 7-day (reverse) repo rate – the benchmark policy rate – at 4.75% on 16 Mar. We believe the room for further monetary easing has closed, as the US Fed increased its policy rate in March, ie the second time in four months. Moving forward, we believe the central bank could maintain its key policy rate in 2017on:
1. Moderate inflationary pressure;
2. Manageable current account deficit.


¨ Deposit facility and lending rates were also maintained at 4% and 5.5% respectively. Bank Indonesia (BI) believes that the move is consistent with its efforts to preserve domestic economic growth while maintaining macroeconomic and financial stability. This is against a backdrop of global risks in the form of rising global inflation, uncertain US trade policy direction, US Federal (US Fed) fund rate hike effects, and geopolitical risks in Europe. It was also on domestic risks with regards towards upward changes in administered price inflation.
¨ BI predicts economic growth to remain strong in 1Q17.The economy is projected to remain relatively strong in 1Q17 when compared to the previous quarter. It is being driven by stronger investment, robust consumption and improving export performance. Non-building investment is predicted to gain traction, reflected by an uptick in heavy equipment and cement sales. Household consumption is expected to continue increasing. This is indicated by stable retail growth and positive consumer confidence. Meanwhile, the Government’s contributions towards consumption and investment are likely to improve as well.
Overall, we are of the view that moderate inflationary pressure, the recent deregulation of government policies, successful implementation of the tax amnesty bill and BI’s aggressive monetary easing last year are likely to boost consumption and private investment moving forward. In addition, prices of Indonesia’s major commodities such as CPO, coal, and metal are rising. This is likely to translate into higher rural household spending.
¨ BI expects global economy to improve, supported by gains in the US and emerging markets as well as rising commodity prices, albeit with several risks that requires vigilance. The US economy has been buoyed by increased consumption and investments, coupled with improvements in employment and income. Meanwhile, rising inflationary pressure in advanced economies could lead to tightening monetary policy in said countries.
Looking forward, several global risk factors continue to demand for heightened vigilance, including further US monetary tightening, which could elevate cost of borrowing and boost USD strength. In addition, the Brexit issue, geopolitical risks in Europe and debt settlement in Greece could increase global uncertainty.
¨ Indonesian financial system remains stable, underpinned by a resilient banking system and relatively sound financial markets. In Jan 2017, the CAR of banks remained high at 23%. This is above the minimum threshold of 8%. At the same time, deposit and loan growth increased respectively to 10% and 8.3% YoY in Jan 2017, up from +9.6% and +7.9% in Dec 2016. This is in line with rising economic activities and the impact from the previous easing of government policies.
Meanwhile, NPLs were recorded at 3.1% gross, or 1.4% net of total loans.
¨ Going forward, we believe inflation would likely trend up but remain manageable in 2017. This would be due to higher fuel prices and stable domestic demand. In addition, the current account deficit in the balance of payments is likely to be contained, although the IDR may continue to face external headwinds. This is as expectations of further US interest rate hikes this year. (Rizki Fajar)
Link to Daily report: Indonesia Morning Cuppa 170317


Economics Update:

Key Takeaways from Meeting with Ministry of Finance officials
We met with Ministry of Finance officials on the Fiscal Policy Agency with the key takeaways are as follows:
¨ The government is comfortable with fiscal deficit at current level and will ensure a small deviation from 2.4% deficit in 2017 state budget. Expensive financing due to rising global rates was one of the main reasons of government’s conservative budget deficit. Recently we also observe government’s effort to improve debt management efficiency by only offering market yields for new issuance.
¨ Fiscal policy for 2017 is focusing on infrastructure and social services. The former will be helped by public service agency, LMAN, which was launched end of last year with land acquisition as one of the main task while the latter will focus on the accuracy and better- targeted subsidy recipients.
¨ For state revenue, the main agenda this year will be on tax law enforcement. Tax investigation, which has been temporarily halted during the tax amnesty period, will be resumed in April. In our view, this must be balanced with government speedy budget spending to avoid any fluctuation in excess liquidity in the system. There is no significant development about cutting corporate tax rate plan so we infer this plan is unlikely to happen in the near term.
¨ Lower YoY government spending in 2M17 is partly due to lower electricity subsidy in 2017 state budget. The disbursement of subsidy is done around 5 times each year. The government also periodically review the regional transfer fund, to avoid escalation of unused budget in the region.
¨ For 2018 state budget plan, the government foresees that the recent President Jokowi economic growth target of 5.4-6.1% YoY is achievable as there are still upside risks for economic growth to expand by more than 5.1% this year.
¨ The government tries to avoid revising state budget each year as it is time-consuming and deemed as a bad habit. The government usually proposes the revision on the budget in May, if there’s any major deviation from the budget assumption.
¨ There will be less stimulus policy issuance this year, as the government focus to optimized the implementation of previous stimulus policies. The 15th policy package is expected to be announced soon.
¨ The government is confident that the S&P will increase Indonesia credit rating this year. This is due to the better shape of the state budget which has been the main issue stopping the S&P from raising the credit rating of the country to an investment grade.
♦ On macro side, we believe economic improvement are progressing albeit at a gradual pace, with larger government infra spending and some recovery on the domestic consumption is expected to permeate into the economy to support growth of 5.2% this year. We expect more visible demand improvement in the 2H17. (Helmy Kristanto)


Results Review:

Aneka Gas Industry (AGII IJ, BUY, TP: IDR1,300), Growth in-line but Interest Expenses Above Expectation
Aneka Gas Industry (AGII IJ, Buy, TP:1,300) released its first quarterly result after IPO in 4Q16, please find some highlight from the numbers, detail pending analyst call with management:
¨ Commendable set of numbers, YoY Revenue, EBITDA, and net profit is up 15.8%, 31%, and 27.1% respectively, revenue and EBITDA was in-line with our forecast but net profit fall short, at 73.4% and 84.6% of ours and consensus estimate.
¨ Main reason of net profit below estimate was due to little change in QoQ total borrowings and interest expense (company has high financial leverage), versus initial guidance of IDR300bn short term debt repaid in 4Q16 with IPO proceeds, pending management explanation on this, I also noticed AGII's press release mentioned the IDR300bn debt repayment and lower total debt of IDR2.2trn but the results number showed otherwise.
¨ Distribution volume is up 17.3% YoY, mostly backed by medical, consumer, and infrastructure sector, according to the press release.

AGII is currently trading at 10x EV/EBITDA based on FY16 numbers. (Norman Choong, CFA)
Corporate News Flash:
Bank Rakyat Indonesia (BBRI IJ, BUY, TP: IDR14,500), New CEO, No Major Kitchen-Sinking Expected
We do not expect any major kitchen-sinking exercises going forward,post the appointment of Suprajarto as the new CEO. In addition, we expect BRI to maintain its focus on the micro lending segment, as the Government has already set a target of IDR110trn for People’s Business Credit (KUR) this year. BRI has decided on a dividend payout of 40%, which should translate to IDR425 dividend per share (c.3.5% dividend yield) – a decent yield in our view. BUY maintained with GGM-derived IDR14,500 TP (19% upside).
♦ Suprajarto as the new CEO. On Wednesday, Bank Rakyat Indonesia (BRI) held an annual general meeting (AGM) with the main agenda to appoint a new CEO. Previous CEO, Asmawi Syam, finished his tenure after two periods as director. The AGM decided on Mr Suprajarto as a replacement for Asmawi Syam.
Prior to this appointment, Suprajarto was the deputy CEO at Bank Negara Indonesia (BNI) (BBNI IJ, BUY, TP IDR6,800). He is not a new figure in BRI as he served as BRI’s director of network and services during 2007-2015.
♦ Expect no major bumps ahead. With Suprajarto’s prior track record in BRI, we do not expect any major bumps going forward. BRI would continue to focus on the micro lending segment in our view, given that the Government has already set a KUR target of IDR110trn for this year.
Apart from that, concerns over potential kitchen-sinking exercises should remain manageable in our view, due to the substantial portion of micro lending in its loan portfolio – estimated at 33.6% of total loans by end-2017 (end-2016: 32.9%).
♦ Dividend payout of 40%. Aside from the appointment of a new CEO, the AGM also decided on a dividend payout of 40%. This payout would consist of a 30% regular payout and a 10% special payout, which should translate into IDR425 dividend per share (c.3.5% dividend yield).
By doing so, BRI’s CAR would fall to 21% from 22.7%, based on our calculations. We believe this CAR level is sufficient to support BRI’s loan growth going forward.
♦ Maintain BUY and IDR14,500 TP. We reiterate our BUY call with unchanged GGM-derived IDR14,500 TP, assuming CoE of 9.5%, ROE of 17.3% and long-term growth of 3%.
Our TP implies 2017F P/BV of 2.2x, which is below its 9-year average P/BV of 2.4x.
♦ Risks to our forecasts include government intervention on micro lending rates, and higher exposure to the KUR programme. (Eka Savitri)

Media Highlights:

Corporate

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Indosat’s Moody rating stays put
Provident Argo plans share buyback
Jasa Marga continues to develop Jakarta Outer Ring Road (JORR) II
Total Bangun obtained new contracts of IDR813bn

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Link to report: Rainy Month, Dry Sales
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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia

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