Good earnings momentum may sustain

4Q22 results review. Seventy-two companies under our coverage have released their 4Q22 results, with overall results marginally exceeding our expectations. Of the 72 companies, 21% booked in-line 4Q results, 39% above and 40% below expected. The banking sector experienced a solid quarter, driven by loan growth and lower provisions, while consumer staple players survived commodity price spike (mainly wheat and CPO), supported by aggressive ASP hikes. The metal mining sector also contributed to robust earnings in 4Q22 due to the higher nickel price (+28% YoY and +15% QoQ).

More favorable outlook going forward. JCI has shown resiliency thus far this year, despite its significant outperformance last year. We observed that foreign investors started to re-enter the equity side in Feb-23, with an average monthly foreign inflow of IDR5.2tn. Foreign investors' positioning remains OW in Indonesia, particularly in the banking sector, and they started to enter the telco and metal mining sectors in 1Q23. We maintain our view for a more favorable outlook in 2H23, as foreign investors will continue to re-enter the equity side, supported by the improvement in Indonesia’s economic growth, primarily due to domestic demand (partially due to election-related spending) amid rising global macro volatility. In addition, we believe that The Fed may reevaluate its hawkish stance by reversing its monetary policy in 2H23. We believe that foreign investors won’t be the only ones who will drive the market going forward, and local funds will also play a big part, as interest rates are likely to have peaked and JCI is currently trading at an attractive 13.4x forward P/E (below -1.5sd).

 

Stick to fundamentally sound stocks. We believe stocks with strong fundamentals and earnings outlooks will outperform JCI. In our opinion, the banking sector will remain the main driver of JCI’s earnings growth in 2023, as we believe that the banks under our coverage can absorb the potential risks of higher NPLs and improve their NIMs in 2023 (especially big banks) amid high interest rate environment, paving the way for an earnings growth of +12.4% in 2023F. Consumer staple players will also continue to see solid margins, even though they should be more careful with their prices to maintain their market share. We also continue to favor the telco sector, as we see potential positive catalysts from election-related trickle-down effects in 2H23 and more mature competition in the industry. We project mid-to-high single-digit growth in the ARPU of Indonesian telco companies in 2023F, while for data traffic, we expect a ~30% YoY growth in 2023F (2022F growth: ~20%), driven by the election momentum.

 

Maintain our JCI target at 7,600. Post-FY22 results, we project JCI earnings to grow by 10.5% in 2023F. Based on our earnings forecast, our fundamental base case scenario index target for 2023F is 7,600, with a P/E of 15.0x. Strong bond inflows of IDR 55.7tn  YTD have lifted rupiah to IDR 14,800 (vs.IDR 15,600 at the end of FY22) as well as bond yield to 6.7% (vs. 7.1% at the end of FY22), which we believe might help to increase the value to the equity over the long run, as Indonesia is perceived as a ‘safe haven’ in the midst of rising global macro volatility, on defensive domestic household consumption. Our top picks are BBNI, BBRI, ISAT, JSMR, NCKL, BIRD, RAJA, ICBP.