Remain positive on fundamentals

1Q23 results review. Most companies under our coverage have released their 1Q23 results, with aggregate net profit growth of 14.4% YoY and 41.2% QoQ. Of the 72 companies, 28% booked in-line 1Q23 results, 26% above, and 46% fell short of estimates. A big chunk of the growth was contributed by the banking sector (+30.3% YoY), which experienced a solid quarter, driven by accelerating loan growth, lower provisions, and manageable NIM despite the increase in TD rates prior to Ramadan/Eid-al-Fitr. Consumer staples (+39.1% YoY) players also experienced a strong quarter with better margins, supported by aggressive ASP hikes and the drop in wheat and CPO prices. Cigarette companies also posted robust earnings in 1Q23 (+37.8% YoY), mainly due to higher ASP and lower production costs. Meanwhile, the oil and gas sector (-6.9% YoY), poultry sector (-101.6% YoY), plantation sector (-67% YoY), and media sector (-67.3% YoY) dragged down the aggregate net profit.

Stable macro environment. We might see some improvements in Indonesia’s economic condition in 2H23 thanks to domestic demand (partly due to election-related spending). Despite the drop in commodity prices, which we believe will provide less support toward Indonesia’s current account and possibly turn the current account surplus (1.5% of GDP for FY22) into a deficit (-0.1% of GDP for FY23) amid the decline in external demand, we expect inflation to continue its downward trend in 2H23 and settle at 2.8% yoy by the end of 2023. In 1Q23, rupiah appreciated by 3.4% to IDR 14,995 per USD, driven by massive foreign capital inflows, particularly into the bond market. Considering this development, we see an opportunity for Bank Indonesia to begin its rate-cut cycle in 2H23. The size of BI rate cuts will depend on global factors, specifically the Fed’s future monetary policy.

Overweight for banks, consumer staples, and telco players.

Considering the better macroeconomic outlook, we maintain our view for a more favorable equity outlook in 2H23, supported by foreign investors as well as local funds, as interest rates are likely to have peaked and the fact that JCI is currently trading at an attractive 13.1x forward P/E (below -1.5sd). At the moment, we believe banking, telco, and consumer sectors will remain the main driver of JCI’s earnings growth in 2023. We are optimistic that Indonesian banks' margins will improve in the upcoming quarters, as some banks still have abundant liquidity and were able to limit the decline of their margins to a mere 20bps QoQ despite their decision to increase TD rates prior to Ramadan/Eid-al-Fitr. We expect our consumer staples universe to book positive growth through the rest of the year, supported by economic growth, higher minimum wages, election momentum, and excellent expansion strategies. Three of the five consumer staples companies in our universe (ICBP, KLBF, and SIDO) are projected to book double-digit growth this year. For the telco sector, we see potential positive catalysts from the trickle-down effect in 2H23 from the election, as well as more mature competition in the industry.

 

Maintain our JCI target at 7,600. Post-1Q23 results, we project JCI earnings to grow by 7.7% 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 59.4tn  YTD have lifted rupiah to IDR 14,800 (vs.IDR 15,600 at the end of FY22) as well as bond yield to 6.5% (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’ amid rising global macro volatility, on defensive domestic household consumption. It is worth highlighting that we include TOWR to our portfolio as we remain optimistic about the long-term prospect for the telco tower industry, and TOWR is the tower player that is most ready to cater to the demand for fiber optic network going forward.