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STRATEGY REPORT - Re-opening the economy in a new normal



An attempt to revive stalled economy during the pandemic 

In a bid to revive the stuttering economy, Indonesian officials have planned to economic reopening in stages starting from June with some health protocols remaining in place. Indonesia economy slowed to 2.97% YoY in 1Q20, the lowest recorded in nearly two decades, even before data reflects the pandemic's full toll. Yet Indonesia’s coronavirus caseload has continued to rise. On 23 May, the country reported 973 new cases, its highest one-day count, bringing its official total to more than 21,000. At time of writing, total confirmed cases have climbed to 23,165, of whom 1,418 have died and 5,877 have recovered (Exhibit 1). Therefore, we weigh for more risk of a second infection wave after the restart of the economy given the massive number of infected persons. Meanwhile, potential policy disagreement between government officials may also dent re-opening effort. 


Rp647.2 tn latest stimulus policies for the economy announced

The Indonesia government announced its latest stimulus package costs a total of Rp647.2 tn (USD43 bn), which is bigger than previous allocation of Rp491 tn. In May, government regulation No. 23/2020 was issued to implement the National Economic Recovery (NER) program, which sets out the latest stimulus policies to soften the economic impact caused by the pandemic. The NER comprises of among others:  1) Rp 172.1 tn for the social safety net, 2) Capital injections of Rp 149.3 tn for 11 SOEs 3) Tax breaks for more industries of Rp123 tn including reduction rate from 25% to 22% for the 2020-2021 tax year. 4) Fund placement at certain banks of Rp87.6 tn  to provide working capital for MSMEs. We believe these measures are positive and highly needed for the economy which is now suffering badly from the Covid-19 pandemic. However, with the launch of the program, budget deficit is expected to reach 6.7% of GDP in 2020, much higher than the anticipated 5.07% of GDP.  


Lukewarm 1Q20 earnings and further cut in 2020-21F earnings

During this month, only 38 of 70 companies under our coverage have reported 1Q20 earnings. Regarding the recent release, most analysts have been highly conservative on quarter results as more negative profits trend likely in 2Q20 due to more impact from Covid-19. Therefore, our analysts further lowered 2020-21 earnings forecasts despite 68% of earnings result looked above and in-line with 2020F forecast while the rest 32% is below. The aggregate reported earnings of our universe constituents totalled Rp42 tn in 1Q20. It recorded flat growth (+1%) on-year supported by non-operating items at EXCL, ICBP, MYOR, and SMGR and would have declined by 6% YoY on normalized basis. The aggregate earnings estimate for 2020-21 of companies under our coverage was cut by 11-3%, respectively with biggest cut at bank, property, heavy equipment, and cement (Exhibit 2). Post results, our universe 2020F and 2021F earnings totalled Rp227 tn (-13.6% YoY) and Rp268 tn (+18.3% YoY), respectively.


Short-term market view and stock ideas on economic reopening theme

In May, JCI rebounded by around 3% from its monthly low level of 4,507 to current level of 4,641 driven by i) optimism about global economic re-opening notably in the US  and ii) local optimism on the coming relaxation of social distancing and gradual economic re-opening. We believe key stock theme of a gradual normalization of business activities are banks that focus on MSMEs loan (BBRI, BTPS), gas distributor (PGAS), mall operators (PWON, SMRA) and automotive maker (ASII). However, we expect any market rebound to be limited by release weak further 1Q20 results release till end of June. Meanwhile, our current top picks remains BBRI , BTPS, UNVR ,TLKM , TBIG , SMGR ,MDKA ,WIKA and PGAS. Our portfolio has declined by 25% so far this year, slightly outperforming broader market by 1%. Moreover, our tactical investment idea on tanker operator (BULL) has given handsome return of 41%. We currently maintain our 2020F JCI target of 5,240 , expecting 17% decline YoY, relatively in-line with earnings decline expectation for this year.  We believe our equity market outlook in the short-term will be guided by the pace of normalization of local economic activity and recovery in risk sentiment.