Caution 1400

STRATEGY REPORT - Volatility may rise; stay cautious



A slow recovery scenario

Our economist now expects a U-recovery for the Indonesia economy as our baseline scenario instead of V-recovery. With cases of Covid-19 are on the rise we believe it would peak in June and be brought under control by third quarter of this year. Therefore, our economist sees recovery would be quite slow in 3Q20 based on his following quarterly forecast growth:  1Q20: 4.53%, 2Q20: 1.69%, 3Q20: 0.84% and 4Q20: 3.24%. This would bring 2020F growth to 2.5% before seeing a relatively stronger expansion of 4.1% in 2021, but it is still lower than the 5.1% average growth rate in the last four years. Meanwhile, the government’s revised 2020 state budget highlights lower income and higher spending against the backdrop of the coronavirus outbreak. State spending is expected to increase by nearly 3% to Rp2,614 tn while revenue is seen slumping by 21% to Rp1,760 tn , implying  Rp853 tn deficit or equivalent to 5.07% of GDP. The government will issue Rp449 tn pandemic bonds and Rp549 tn government debt papers to finance the country’s efforts to combat the health crisis and economic turmoil caused by the Covid-19 pandemic.


Volatility makes comeback

Since bottoming on 24-Mar at 3,912, the JCI has seen stronger-than-expected recovery to 4,976 on 7-Apr or has risen by 27% before receding by 10% to 4,481 at time of writing. We believe the main reasons behind this unexpected strength was i) global markets got excited as many central banks and governments announced larger-than-expected monetary and fiscal stimulus measures, and ii) a number of European countries showed a decline in new cases. This also played out similarly in Indonesia stock market despite the country is relatively at an earlier phase of the pandemic. The health ministry reported 5,516 cases with 496 deaths while 548 have recovered as of 16 April. We believe market strength may end soon without a clear course for revival. Therefore, we think the equity market would be confined in a cautious mood until the third quarter of this year.


Expecting negative earnings growth this year

Around 82% of 68 the companies under our coverage have reported 2019 results so far. On net profit front, most of these companies have reported in-line results (61%) while 14% reported earnings below estimates and 25% exceeded estimates. Post results, our analysts have cut 2020-21F earnings forecast across sectors by 10-52% amid the wide-scale shutdown in various businesses sectors in the wake of the spreading Covid-19. The aggregate reported earnings of our universe totalled Rp74.8 tn in 4Q19 which registered positive growth sequentially at 11% QoQ as 4Q is normally the strongest quarter for most sectors, bringing cumulative FY19 growth to 3.4% YoY to Rp264 tn.  However, after taking account Covid-19 impact, our universe earnings would decline by 6.7% to Rp246 tn in 2020F and grow by 12.0% to Rp276 tn in 2021F, translating to market EPS of 369 and 412 (Exh. 1)


Call for YE-2020 JCI target of 5,240

Following our market EPS target cut , we revised down our year-end 2020 JCI target to 5,240, based on 12.7x forward earnings or -1sdev below its mean (Exh. 2). We believe earnings multiple target below mean is justified by weak earnings forecast and the challenges faced by Indonesia’s equity market reflected by declining foreign shareholdings (Exh. 3). Indonesia stock market saw year-to-date foreign fund outflow of USD964 mn. Further de-rating can be expected if there are more earnings cuts in the coming months as the end of the pandemic remains uncertain at this juncture. We advise investors to stick to i) good quality large-caps which have corrected more than 25%, providing margin of safety there which include BBRI, UNVR, TLKM. These are also the ones which could withstand the wind better than the others due to their strong fundamentals. We also like ii) bank with very thick margin (BTPS) , iii) defensive stocks that have been oversold such as TBIG, SMGR and PGAS, iv) gold producer (MDKA) due to gold status as safe haven and v) infra play with attractive dividend yield (WIKA) which should moderate any downside risk (Exh. 4).