RHB Indonesia - Indonesia Strategy: Exuberance Over Positives Ahead Unknown Rabu, 05 April 2017




Good morning,
Indonesia Strategy: Exuberance Over Positives Ahead
The recent surge of foreign inflow has driven up market performance, mainly fuelled by the S&P upgrade prospect. Post tax amnesty period, which ends in Mar 2017, tax officials would focus on tax law enforcement. As at 1Q17, government tax revenue was up 18% YoY, which should be balanced by the Government’s timely budget spending to avoid any fluctuation of excess liquidity in the system, in our view. The outcome of Jakarta elections on 19 Apr would set the market’s tone in the short term.
¨ S&P upgrade euphoria. Despite an improvement in Indonesia’s macro-economy, achieving S&P’s investment grade status remains elusive despite Fitch and Moody having listed Indonesia into investment grade years ago. In recent weeks, the prospect of an S&P upgrade in May re-emerged, enticed by significant foreign inflow to the equity market. Our recent meeting with Finance Ministry officials revealed their optimism for upgrade. In our view, the current government’s move to boost infrastructure spending by making considerable cuts on energy subsidy has totally changed the economic structure. This should lead to more productive asset spending. The recent tax amnesty programme to improve tax collection is also a move into right direction, which should lay a stronger foundation for the government budget, on top of the improvements in spending capabilities. All of these factors have placed significant positive distinction to the current Government. Currently, Indonesia’s 10-year bond has the largest spread to the US Treasury in the region, at 464 bps given the non-investment grade status. The upgrade would lead to a smaller spread, lowering both risk free and premium, whichwould result in higher equity value.

¨ Conclusion of tax amnesty. The tax amnesty programme, which ended in March, achieved its target in terms of assets declared worth IDR4,865.7trn in total. Nonetheless, asset repatriation fell way below the target, reaching less than 15% from the target. In our view, the recent political turmoil relating to the election of Jakarta’s governor has deterred asset repatriation. This is especially so given the minimum 3-year lock-in period of the asset. Tax penalties from this overall tax amnesty programme falls short from the target, reaching 81% of the target of IDR165trn, which was still outstanding given the Government’s rather aggressive target. In our recent meeting with the Finance Ministry officials, they mention that the main agenda this year would be on tax law enforcement. Tax investigation, which had been temporarily halted during the tax amnesty period, would resume in April. In our view, this must be balanced by the Government’s timely budget spending to avoid any fluctuation of excess liquidity in the system. Based on the recent data, government tax revenue rose 18% YoY in 1Q17 to IDR222tn, accounting for 16.9% of its target, higher than the Government’s target of 16%. We now expect lower budget deficit of 2.6% of GDP in 2017 vs our previous deficit projection of 2.8% of GDP. Furthermore, in our recent meeting with the Finance Ministry, the officials also stated that the Government is comfortable with the fiscal deficit at the current level and would ensure a small deviation from a 2.4% deficit in 2017 Budget.
¨ Election outcome to set market tone in the near term. We maintain our 5,850 index target, and expect a more pronounced demand recovery in 2H. Foreign inflow into the equity market reached IDR10.1tn is a major turnaround, amounting to almost half of the total outflow recorded in Sep 2016-Feb 2017. The outcome of Jakarta elections on 19 Apr would dictate the market’s direction in the short term, while continued progress on macroeconomic improvement would provide long term positive catalysts. After an exclusion from our Top Pick league last month, LSIP is now our top Sell, following our sector downgrade. (Helmy Kristanto)

Link to report: Indonesia Strategy: Exuberance Over Positives Ahead
Link to Daily report: Indonesia Morning Cuppa 050417




Sector Update:

Coal Mining - Monetising Australian Coal Supply Disruption
After Cyclone Debbie disrupted coal supply in Queensland – sending coal prices up 10% to USD89/tonne – we think it is time to further accumulate Indonesian coal miners, as they would be the beneficiaries of Australian supply disruption. Bukit Asam is our Top Pick and we also like Harum Energy. Flooding associated with the cyclone in Queensland, Australia, caused serious damage to some of the country’s key rail lines. According to the ABC, it may take about five weeks before exports from the state can resume.
¨ Coal supply disruption in Australia boosts coal prices. Yesterday, coal futures prices (Newcastle 6,000kcal/kg) spiked by around 10% to USD89 per tonne on the back of Australian coal supply disruption, due to the recent impact of Cyclone Debbie in Queensland.
Indonesia and Australia are two of the biggest coal exporters in the world. Coal exports from the latter may be disrupted for several weeks, as flooding associated with the cyclone in Queensland last week caused damages in some of the major rail lines in Queensland. This may increase the probability of major coal producers in Queensland declaring force majeure, in our opinion. The worst hit by recent Debbie Cyclone is Goonyella rail line, which is used to deliver coal from the Bowen Basin's mines to coal ports of Dalrymple Bay and Hay Point.
¨ Queensland may take about five weeks to resume coal export. The Australian Broadcasting Corporation (ABC) reported that it may take about five weeks to be able to resume exports from Queensland. Queensland’s coal supplies contribute more than 50% of world coking coal supplies. In FY16, Queensland produced and exported thermal coal of 83.2m tonnes and 59.7 m tonnes of coal, respectively. Goonyella rail line is used to deliver more than half of Queensland's coal supply. Standard & Poor’s reported that between 15m and 20m tonnes of coal, which should be exported to Asia have stranded in Australian ports since last week.
¨ Indonesian coal production is operating normally, as there are no cyclones in Indonesian coal production areas. Based on our channel checks with several Indonesian coal miners, although there has been some rainfall at their coal mining sites, their coal production is on track. Therefore, we believe Indonesian coal should temporarily replace Australian coal supply in the world market.
¨ Indonesian coal miners would be the beneficiaries of Australian coal supply disruption, as they would be able to enjoy the higher coal prices and maintain delivery without any interruption in their coal production.
¨ Bukit Asam is our Top Pick, while for small caps, our Top Pick is Harum. For the reasons above, we think the Queensland supply disruption should increase all Indonesian coal miners’ share prices.
¨ Bukit Asam is our sector Top Pick as:
i. It is a laggard play in the coal mining sector;
ii. Its FY17F earnings should grow by 66%YoY on the back of higher coal selling price and sizable coal volume growth.
¨ Harum is our small cap Top Pick as:
i. We think FY17F earnings should spike, growing 161%YoY on the back of a substantial increase in its coal volume and higher coal selling price. We think a considerable consensus earnings upgrade ahead for Harum should boost its share price;
ii. It holds cash of USD231m and minimal capex in FY17. Dividend payment from its FY16 net income should also be a positive surprise. (Hariyanto Wijaya, CFA, CPA)

Link to report: Monetising Australian Coal Supply Disruption
Media Highlights:

Corporate

Wijaya Karya Beton booked IDR1.5trn in new contracts
Bank Negara Indonesia targets syndicated loans to grow 20% this year
Waskita Beton reached 35% of new contract target
Puradelta Lestari booked IDR559bn in marketing sales in 1Q17
Government will collect broadcasting fee
Government puts cap on gas trading business margin

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Indonesia Economic Outlook: Stronger Growth As Exports & Government Spending Recover
Company Update: Tower Bersama Infrastructure – Moderated Growth And Stretched Balance Sheet
Results Review: Indofood Sukses Makmur – Healthier Balance Sheet, Lower Debt
Results Review: Indofood CBP – A Likely Better Outlook In 1Q17
Sector Update: Engineering and Construction – Time To Rise
Link to report: Time To Rise


Best regards,

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

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