RHB Indonesia - Telecommunications - Promotions Of No Meaningful Impact To XL And Indosat (Telecommunications, Coal Mining, Arwana Citramulia, Economics) Unknown Jumat, 21 Juli 2017




Good morning,

Telecommunications - Promotions Of No Meaningful Impact To XL And Indosat

We studied the IDR1/second call and free SMS campaigns of XL and Indosat and found them to be gimmicky. While we believe these might entice new subscribers, they are not likely to have meaningful financial impact to both telcos due to the long lists of restrictions in the terms and conditions. Further, we rollover our sector valuation base to FY18F. Maintain BUY on XL in anticipation of a better commercial execution and NEUTRAL on Indosat due to concerns of its low ARPU and congested network. On the sector, we maintain our OVERWEIGHT recommendation.


¨ Competition heating up, difficult to increase profitability. XL Axiata (XL) has introduced “Kartu Perdana Super Ngobrol Baru”, targeting new subscribers and a counter measurement to Indosat’s IDR1/second call promotion. The attractive parts of this promotion are the free calls and SMS to fellow XL users. Our observation and channel checks also reveal that XL has stepped up its game with the roll out of its 900 MHz frequency (U900) that improved its 3G network. XL's 4G network also has the highest capacity in the industry. The latest promotion now puts it toe to toe with Indosat in terms of freebies.
¨ The catch behind IDR1/second promotion. For calls to other operators, the IDR1/second call promotion from XL is only good for one minute/day, meanwhile, Indosat’s IDR1/second call promotion is available for maximum of five minutes/day, depending on the area. The ex-Java market is getting a better promotion than the Java market. This is as smaller cities and the rural areas are still heavy on voice and SMS usage compared to the bigger cities that have largely switched from traditional voice and SMS to data messaging and call.
¨ Indosat raised prices of its larger data packages in June. Prices for its FREEDOM COMBO XL and XXL were raised by 10% respectively since mid-June while prices of its FREEDOM COMBO M and L were maintained. We do see the urgency for Indosat to raise prices, given its lowest ARPU and highest data traffic growth. Its investment of new base transceiver stations (BTS) and network improvement are also slower than its competitors.
¨ Maintain our OVERWEIGHT stance given the expectation of stronger data revenue growth to continue and a higher subscriber growth from 2Q17 onwards. We expect sectorial ARPU to plateau while data revenue maintains its strong growth trajectory. Downside risks are the resurgence of data price dumping and faster-than-expected voice and SMS revenue erosion.
¨ Maintain BUY on XL with a higher TP of IDR3,700 (from IDR3,355). We rollover our valuation basis to FY18F, our DCF-derived TP implies 5.5x FY18F EV/EBITDA. Coming from a low base of FY16, we expect XL to better monetise its 4G network, regaining some market share with the rollout of U900 and better marketing campaign.
¨ Maintain NEUTRAL on Indosat with a lower TP of IDR6,600 (from IDR7,100). We trim our revenue and EBITDA estimates for FY17F-18F by 2.4-5.5% and rollover our valuation basis to FY18F, our DCF derived-TP implies FY18F EV/EBITDA of 4x. Given its low ARPU of IDR21,000, we are wary of its inability to increase profitability and it may potentially lose subscribers due to its congested network and the aggressive marketing campaign by its competitor. (Norman Choong, CFA, Jeffrey Tan)
Link to report: Promotions Of No Meaningful Impact To XL And Indosat
Link to daily report: Indonesia Morning Cuppa 210717


Sector Update:

Coal Mining – Positive Momentum To Build Up
We think positive momentum on the coal sector should build up on the back of increasing coal price and potentially positive 2Q17 earnings, as such, we upgrade our sector call to OVERWEIGHT (from Neutral). The Japan Meteorological Agency estimates above-normal temperatures to occur in 3Q17 in most of western South-East Asia and East Asia, which should increase coal consumption from China in 3Q17. Indonesia coal export volume in the first two weeks of July looks healthy, although China has started to implement stringent quality requirements on its imported coal from 1 Jul. Our Top Picks are Bukit Asam and Delta Dunia. We think their share prices have still not factored in their sizable forecast earnings growth.

¨ Coal price rally. Newcastle coal futures prices have rallied, reaching USD86.00/tonne. The reasons behind the rally are:
i. China’s big coal producers are only selling long-term contracts as per the Chinese Government’s guidance. This leads to limited coal availability in the spot market;
ii. Decreasing inventory days at China power plants, as a result of recent higher coal consumption and increasing coal delivery time to power plants – due to China’s decision to ban imported coal at small ports and stringent quality standards since 1 Jul. We think the spike in coal price may not sustain, but it would take time to normalise coal supply flow.
¨ Increasing coal prices + potential positive 2Q17 earnings = positive momentum build-up. We think the combination of increasing coal prices and potentially positive earnings of coal companies (to be released in July) should bring positive momentum to the coal sector. Consensus still assumes coal prices of USD65.00-75.00/tonne for FY17/18 (average 6M17 coal spot price: USD81.00/tonne). The earnings of coal miners are sensitive to changes in coal prices, wherein a 10% increase in coal prices would increase their earnings by around 15-20%.
¨ Estimated above-normal temperatures this summer should increase coal demand from China’s coal-fired power plants. The Japan Meteorological Agency forecasts above-normal temperatures this summer in 3Q for most of western South-East Asia and East Asia. Such drier-than-normal weather should increase electricity consumption for air conditioning, curb the output of China's hydropower generation, and boost the output of China’s coal-fired power plants, which should lead to higher coal demand.
¨ Indonesia coal export volume is healthy. China is one of Indonesia’s top coal export destinations. We think the impact of its stringent quality controls (since 1 Jul) is likely to be muted on coal companies under our coverage as they produce high quality coal with low production costs. According to Global Ports data, Indonesian coal export volume in the first two weeks of July grew by 7.1% (vs the first two weeks of June) to 6.5m tonnes.
¨ Bukit Asam and Delta Dunia are our Top Picks. We upgrade our call to OVERWEIGHT (from Neutral) as we expect positive sector momentum to build up. We like Bukit Asam for its forecast substantial earnings growth, and believe it should enjoy both higher coal sales volume and higher coal selling price. We also like Delta Dunia as we think its sizable earnings growth would come from significant volume growth and better mining contracting fees that are still not reflected in its share price. We think consensus earnings upgrades post 2Q17 results would be near-term stock catalysts. (Hariyanto Wijaya, CFA, CPA, CMT)
Company Update:

Arwana Citramulia (ARNA IJ, BUY, TP: IDR550), Earnings Should Improve In The Following Quarters
Arwana’s earnings should grow in the coming quarters, driven by higher sales volumes (post-Lebaran), improved sales mix after a new UNO tiles production line kicks off at its Gresik plant, lower operational costs after disbursing a 1-month bonus salary as Lebaran allowance, and lower fixed costs per unit from higher utilisation rate. It is also reducing gas consumption per sqm in production, as well as its defective product rate to improve cost efficiency. BUY, with unchanged DCF-derived TP of IDR550 (20% upside), which implies 25x/17x FY17F/18F P/Es respectively.

¨ Sales volume and sales mix likely to improve. We expect Arwana Citramulia’s (Arwana) sales volume to grow in the coming quarters, due to the absence of Lebaran holidays. It would also be boosted by an increase in property development activities, which are cyclically higher in 2H and are partly driven by the Government’s 1m houses programme.
Its sales mix should also improve when an UNO production line at its Gresik plant becomes operational this month. In 4Q17, it will shift some production lines at its Pasar Kemis, Cikande, and Mojokerto plants to manufacture Digi-UNO tiles. Hence, Digi-UNO tile sales should increase by the end of the year.
¨ Lower operational and fixed costs per unit. We expect Arwana’s operational costs to decline after it paid out a month’s salary to workers for their Lebaran allowance. The Lebaran allowance was the main reason its general and administrative expense per sqm rose to IDR1,400/sqm (+20% QoQ) in 2Q17.
We expect its fixed cost per unit to decline in tandem with the increase in its utilisation rate. Its utilisation rate declined to 80% in 2Q17 (1Q17: 92%) on the back of its sales volume declining 14% QoQ during the quarter. This caused its 2Q17 COGS to rise by 3% QoQ to IDR25,500/sqm.
¨ Continuously improving its efficiency rate. Arwana is working to sustain the improvement in its operational efficiency, especially by lowering its gas usage per sqm in production and cutting down the rate of defective products. For 2017, it expects to lower gas consumption per unit of production by 9% YoY. This should significantly reduce its COGS, since gas accounted for 39% of 1H17 production costs. The company also targets to reduce the rate of defective products during the manufacturing process to 1% by end-2017 (from 3.5% in 2016). Its defective products rate declined to 1.4% in 1H17.
¨ Seasonally weak 2Q17 earnings. 2Q17 earnings were IDR22bn (-44% QoQ, +38% YoY). We believe the QoQ decline was driven by seasonal factors that dampened its quarterly sales volume (the 10-day Lebaran holiday period), and higher operational costs (ie the 1-month extra salary paid out as a festive allowance). Thus, earnings should improve in the following quarters.
¨ Maintain BUY, with unchanged DCF-derived TP of IDR550 that also implies 25x/17x P/Es for FY17F and FY18F respectively. (Andrey Wijaya)
Economics Update:

BI Continues To Hold Key Policy Rate In July
Bank Indonesia’s (BI) board of governors held the 7-day (reverse) repo rate – the benchmark policy rate – unchanged at 4.75% on 20 Jul. As inflationary pressure is moderate while the current account deficit is manageable, we believe the central would maintain its key policy rate for the rest of 2017.
¨ Deposit facility and lending rates were also maintained at 4% and 5.5% respectively. BI believes that the move is consistent with its efforts to maintain macroeconomic and financial stability while preserving the domestic economic recovery process. This is against a backdrop of global risks particularly in the form of the current discourse over US policy direction. There are also domestic risks with regards to consumption slowdown and ongoing consolidation in the corporate and banking sectors, which have undermined the impact of the various economic stimuli introduced.
¨ BI sees the economic recovery process to continue in 2Q albeit not as strong as previously projected. Consumption growth is potentially lower, as reflected by slower retail sales. Exports continue to grow, albeit below the previous projection due to slower growth of export volume for primary and manufacturing goods. In contrast, investment performance is improving, especially in the non-building sector related to natural resources, while building investment remains solid supported by government projects and private property sector.
¨ Going forward, we believe inflation would likely trend up to 4.2% in 2017 (2016: +3.5%), but would remain manageable. This would be due to higher fuel prices and stronger 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 on the back of expectations of further US interest rate hikes this year and next.
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 would likely boost consumption and private investment moving forward.
¨ BI expects the global economy to keep improving, supported by gains in the Europe, China and other emerging markets, as well as rising commodity prices – albeit with several risks that require vigilance. As global economic growth improved, world trade volume also showed increases.
Looking forward, several global risk factors continue to demand heightened vigilance. These include the US Federal Reserve’s (US Fed) plan to reduce its overall balance sheet and the impact on global financial markets, the US Fed’s rate hike plans, and uncertainties in the fiscal policy.
¨ The Indonesian financial system remains stable, underpinned by a resilient banking system and relatively sound financial markets. In May, the capital adequacy ratio (CAR) for banks remained high at 22.7%. This is above the minimum threshold of 8%.
Meanwhile, NPLs remained relatively stable at 3.1% (gross) or 1.4% (net). Deposit growth picked up to 11.2% from 9.9% over the same period. At the same time, loan growth moderated to 8.7% in May, down from +9.5% in the month earlier. This was due to shorter working days due to festivity. (Rizki Fajar)

Link to report to be sent out later
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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT RHB Sekuritas Indonesia


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