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STRATEGY REPORT - Confidence but cautious



January portfolio significantly outperforms the JCI index

In January, our portfolio declined by only 1.4% outperforming the JCI which dropped by 5.7% (-4.2% in USD terms) weighed down by the unexpected shock from the coronavirus outbreak. Most of our top picks showed resilience against turbulence with all stocks return exceeding the JCI return. Major contributors to our top picks were 1) MDKA which was  up by 9.3% as it is considered as gold play (safe haven in times of market turmoil),  followed by 2) BTPS (+3.8%) after our analyst increased her TP on solid earnings and 3) BBRI (+1.4%) which reached its all-time high level in January. SMGR (-0.4%), INDF (-1.3%), TLKM (-4.3%), WIKA (-5.0%) and TBIG (-5.7%) largely contributed to the loss in our model portfolio but still outperform the JCI. Foreign investors were net buyers of USD1.1 mn Indonesia equity in January. The daily turnover of shares decreased substantially from an average of Rp6.7 tn (USD489 mn) in FY19 to Rp4.8 tn (USD35 mn) in Jan-20. We believe was attributable to decline in risky assets in a broad risk off-mode and  800 securities accounts blocking allegedly linked to the scandal of state-insurer Jiwasraya.


The Coronavirus remains a big wild card

We believe that February’s stocks will continue to fluctuate because many uncertainties still exist-not the least the Coronavirus. Despite the concerning news flow, we do not expect the negative impact on financial markets to be long-lasting. Using the SARS crisis in 2003 as a reference point, the SARS intensified in February 2003 and peaked by end-April. On the other hand, we are rather cautious on the equity market with risk of more earnings downgrades after the 4Q19 earnings season. Our bank analyst has revised FY20-21F BBRI earnings by 5-6% earnings incorporating adjustment on provision related to the IFRS 9 implementation. She also revised earnings on BBNI and BMRI for housekeeping purpose. Our construction analyst significantly revised FY20-21F earnings of contractors by 20-38% subsequent to weaker-than-expected FY19 new contacts and incorporating PSAK 71-72 impact to contractor financials.


Still favorable macro economic

Indonesia Statistics Office (BPS) just announced Jan-20 CPI and 2019 GDP numbers. CPI inflation only edged up by 2.68% in Jan-20, which came lower than our and consensus expectations. Meanwhile, GDP grew at 4.97% YoY in 4Q19, bringing GDP growth of 5.02% YoY in 2019, which came slightly higher than our and consensus forecast at 4.98-5.00%, respectively. We maintain our 2020 GDP growth at 5.1%, as stronger GFCF is expected to offset lower consumption. Therefore, we maintain our expectation of a total of 50 bps of policy rate cuts in 1H20 in line with BI’s pro-growth stance. Barring it becoming a full-blown global pandemic, coronavirus outbreak will have limited impact on Indonesia economic fundamentals as Indonesia’s export to China are relatively low at 2.2% of GDP  despite accounting for 16.8% of total exports.


Lower market EPS and JCI target to 6,930

Blending our refreshed FY20-21F EPS market of 420 (+9.6%) and 462 (+9.9%) and forward PER of 15.0x (-1stdev of mean), we slashed our YE-20 JCI target from 7,190 (set in Oct-19) to 6,930, implying 10% return for this year. We stay overweight Indonesia as we expect GDP growth to recover to 5.1% supported by accommodative policy. Moreover, given the recent correction market valuation have turned attractive at FY20F PER of 14.0x which is equal to 2015 GFC low. We include BMRI and BBNI which are now trading lower than historical average into our portfolio replacing BBRI and BTPS. We also include BULL, a small-cap tanker operator, which we expect to book 164% earnings on fleet and margin expansions. We retain INDF, TLKM, TBIG, WIKA, SMGR, and MDKA in our stock picks.