4Q/FY20 earnings look set to miss expectations
The 4Q20/FY20 results season is underway and it has been extended until end-May on pandemic relief measures. Approximately 62% (42 of 69) companies under our coverage have announced their results. The aggregate reported earnings so far recorded negative growth sequentially at 13% QoQ in 4Q20, bringing 36% YoY decline for FY20. We believe this was mainly attributable to 21% QoQ decline in Banks earnings (49% of aggregate earnings) due to higher provisions to accommodate downgrade risks of Covid-19 despite in-line operating results. Within our universe, 42% of stocks under coverage that have already announced their results, reported lower than expected earnings. Of the rest, 20% posted earnings that were higher than expected and 38% which came within expectations. Sectors for which results disappointed with earnings expectations mostly cut were automotive, property, mining, toll road, construction. Most plantation companies under our coverage have experienced a stronger quarter in 4Q20 and saw FY20 earnings beat as CPO prices sharply jumped in 4Q20.
Real rebound in earnings to come in 2Q21
Over the first two months of 2021, banks loan growth and corporate operational data (car, heavy machinery, cement, and retail sales) continued to inflect lower. Strong volume recovery was only seen at gas distribution with 2M21 PGAS volume going up by 4.1% YoY to 919 BBTUD nearly back to pre-Covid level of 988 BBTUD. While official GDP numbers for the March quarter are due early May, corporate operational data point to economic sluggishness might persist in 1Q21. Moreover, Minister of Finance sees GDP contraction between 1.0 and 0.1% in 1Q21. Therefore, there’s a risk that 1Q21 corporate earnings are lackluster and don’t offer the confirmation of the economic recovery that many investors have been betting on yet. On a positive note, Indonesia’s manufacturing PMI hit 10-year high, standing at 53.2 in March and several media indicated very strong increase (almost double MoM) in car volume order on dealer level following the implementation of luxury tax relaxation. Indonesia’s daily Covid-19 cases might have peaked out and we believe the inflection point was partly due to the vaccine rollout since January. Therefore, it is likely corporate profitability will fare much better in 2Q21.
April market view: uncertainty lingers
A rise in US bond yields and the uptrend in dollar index (DXY) are worrying investors. This prompted Indonesia equity market to see major volatility in 1Q21 with JCI’s monthly return of -2.0% in Jan-21, 6.5% in Feb-21 and -4.1% in Mar-21 bringing 1Q21 return of only 0.1%. Moreover, US inflation is poised to accelerate in the months as the so-called “base effect” will push up the headline rate. The sharp declines in inflation at the start of the pandemic will likely cause the annual measure to jump above 2%, driving further increase in bond yield. Retail investors have also been less active in the equity, as average daily trading value in IDX continued declining from Rp19.2 tn in Jan-21 to Rp10.6 tn in Mar-21 while government pension body plans cutting equity exposure. Nevertheless, DXY could peak somewhat in April following the introduction of US tax hike and ballooning deficit from US infrastructure plan. A decline DXY after its peak is positive for commodities and emerging market equities. Therefore, we expect market to remain volatile tracking mixed global cues in April. On the domestic side, there will be huge sentiment booster for Indonesian equity market if the merger and listing plans of Indonesia tech giant Gojek and Tokopedia materialized in 2Q21.
Top picks: Add BBCA, ICBP, and PGAS, remove BBRI, MEDC, and ANTM
The JCI declined by 256 points (4.1%) to 5,985, mainly weighed down by selling pressure in heavyweights led by BBCA (-7.3%, contributing to 53.6 point decline) and BBRI (-6.7%, 36 points decline). Our portfolio dropped by 7.9% in March mainly dented by disappointing performance of commodity picks such as MDKA (-20.8%), MEDC (-18.0%, despite a solid crude price of +2.5% MoM to USD65/bbl) and ANTM (-13.5%) which we believe were mostly negatively affected by DXY sentiment. During 1Q21, our stock picks posted an accumulated return of -3.0%, underperforming the JCI that inched up by 0.1% but outperforming the LQ45 index’s return of -3.4%. Given the likelihood of high volatility continuing in the market for some time, we believe investors would do well by accumulating good-quality companies on declines in the market. We add BBCA and ICBP to replace March underperformer BBRI and MEDC. Given nickel prices uncertainty we remove ANTM and add PGAS as we think a lot of negativity from tax cases got priced in while its distribution volume continue trending up (see our top picks list on Exhibit 4).