Indonesia Strategy:Split views

Conclusion

    We spent the past two weeks meeting investors domestically, in Singaporeand Kuala Lumpur, to discuss strategy and financials, including our recentmarket downgrade to a neutral stance. Feedback was mixed, with split viewson whether earnings and potentially lower cost of capital (bullish) or recentpolitical events and uncertainty (bearish) will drive the market from here.

    Impact

    We moved to neutral on the market for three key reasons: (1) the -16%correction ytd in Indonesia’s key commodity exports inferred by marketforward curves, which we see changing from tailwind to headwind into FY18e;(2) recent political events, which we expect are in effect bringing forward thecentral gov’t re-election cycle a year earlier into FY17; and (3) valuations,which are elevated at 1-std dev above both forward and trailing P/E, leavinglimited room for disappointment.

    Politics, private sector investment and populism. The main bearishargument is the fallout from escalating political tensions surrounding theJakarta election. In our view, the economic impact is likely to be lower privatesector investment as business owners adopt a wait and see approach untilthere is more clarity. Investors are also increasingly concerned the gov’t mayturn more populist in its bid to bolster re-election prospects for 2019. Againstthis backdrop we observed little interest in the property sector and some risingnegative sentiment on SOEs.

    Earnings have been supportive. On the positive side, FY17e EPS appearon track to reach +16% y/y with 1Q17 25% of consensus estimates. Thatmultiples are elevated in this context did not really concern investors we met.

    Lower cost of capital could be a further tailwind. Though the S&P upgradeto investment grade recently appears to have been largely priced in ahead ofthe event, with bond and currency markets stable, we agree with investorfeedback that lower sovereign yields driving down risk free rates is an upsiderisk that would lead to multiples rising. We currently use a 6.5% risk free rate(mid-point between 1 and 5 year IDR Sovereign yields).

    Key stock picks: We had most interest from investors in our views onCement/Contractors into the anticipated pickup of public-sector spendingduring 2H17 and UNTR following the recent pull back. Banks have performedwell and we encountered limited pushback to our preferred large caps BCAand BRI with rising interest in Danamon. An improving earnings outlook onbetter credit charges appears widely expected.

    Outlook

    We reiterate our neutral call on the market and 5,700 year-end JCI target. Ourmodel portfolio is comprised of: BBCA, BBRI, BDMN, ACES, MAPI, UNTR,ADRO, EXCL, PTPP, INTP.