Election overhang will fade away

2Q23 results review. Most companies under our coverage have released their 2Q23 results, with aggregate net profit growth of 7.3% YoY and -3.3% QoQ. Of the 54 companies, 28% booked in-line 2Q23 results, 28% above, and 44% fell short of estimates. A big chunk of the growth was contributed by the banking sector (+21% YoY), with BMRI and BBCA leading the way. Most retailers under our coverage posted strong revenue growth in 1H23, led by MAPI. Telco sector also posted strong results due to EBITDA margin expansion thanks to higher ARPU, except for TLKM (which booked higher opex in 2Q23). On the other hand, it is worth highlighting that consumer staples results were quite mixed, as 2 out of 5 consumer staple companies under our coverage (SIDO and KLBF) posted lower-than-expected results, mainly due to the drop in purchasing power (caused by price spikes) and changes in spending behavior (downtrading).

Election overhang to fade away. JCI reported a foreign outflow of IDR 800bn MTD (YTD JCI inflow of IDR 14.6tn), of which IDR 760bn was contributed solely by GOTO. Post-2Q23 results, foreign ownership in telco sector shifted from TLKM to ISAT and EXCL, while in the banking sector, BBRI recorded a net outflow of IDR 795bn MTD and BMRI recorded a net inflow of IDR 940bn MTD. Even so, the banking sector remained the sector receiving the largest inflow MTD (IDR 500bn). In the near term, we still expect JCI to move sideways due to the lack of clarity surrounding the Fed's terminal rate. However, towards the end of the year, we believe that election overhang will fade away, which should help boost Indonesia's economic expansion and support foreign fund flows to return to the equity side, as we believe Indonesia's domestic economy might be one of the most popular emerging investment destinations in the future.

Overweight on election proxies. We continue to overweight election proxy sectors such as telecommunications, consumer staples, and banks, as we continue to believe these sectors could still deliver robust growth in 2H23, supported by election campaigns (which should provide some boost for domestic consumption). We anticipate telco companies to report stronger results in the second half of 2023, supported by: 1) the election’s trickle-down effect, which may increase data traffic; and 2) the positive trajectory of ARPU. The consumer staples sector will also benefit from election momentum and political campaigns in 2H23F and FY24F, as those momentums tend to increase people's purchasing power, particularly among the middle-low income bracket. We believe that ICBP will gain the most from this election, just as it did in the previous one. However, El Nino poses a threat to ICBP because it may cause raw material price spikes, the effects of which could be felt next year (FY24F). We also still like the banking sector, as system liquidity remains adequate, and we may see an increase in fiscal expenditure in 2H23, leading to a rise in M2 and, ultimately, a rise in loan growth in 2H23.

 

Lower our end-2023 JCI target to 7,300 from 7,600. Post-2Q23 results, we project JCI earnings to grow by 9.0% in 2023F. Our new fundamental base case scenario index target for 2023F, based on our earnings forecast, is 7,300 (prev: 7,600), as we lowered our target P/E to 14x due to increased equity risk premium. We believe JCI’s undemanding valuation should eventually rerate once the election overhang subsides and the Fed's terminal rate becomes clearer. In this report, we add MEDC, BRMS, and BMRI into our top picks. We favor MEDC due to the recent momentum in oil prices, the company's sensitivity to rising oil prices, and its reasonable valuation of 4.0x 2024F EV/EBITDA. We favor BRMS, as we anticipate the company to record gold production volumes of >40k oz in 2023F and >70k oz in 2024F, aided by the additional processing capacity from its 3rd plant in Palu (total capacity: 4ktpa) and 4th plant in Gorontalo (2ktpa). We believe that BMRI deserves a re-rating because it already has adequate coverage and a lower asset quality management risk than other banks.