Research & Stock Picks

Emiten Report

23 June 2023

By

Strategy: Equity can potentially grind higher

Equity can potentially grind higher

Less volatility in 2H23. The net sell trend on the Indonesian stock exchange has not altered in June-23, with total foreign outflows MTD reaching IDR 3.7tn. However, we expect foreign fund flows to return to the equity side in 2H23 since we believe that external factors will stabilize and interest rates have reached their peak. The Fed may even decide to cut its FFR in the coming months, thereby increasing the likelihood that investors will reinvest and rebuild their portfolios. Amid fears of a global recession, we believe Indonesia could be one of the most popular emerging market investment destinations due to its domestically driven economy, which makes it relatively resilient. Additionally, election-related spending will contribute to Indonesia's economic expansion in 2H23.

Local funds to support JCI. Not only foreign flow, we expect local funds to support our index in 2H23. We believe local funds will eventually deploy more cash, with many believing interest rates have peaked and that JCI is trading at an attractive 13.1x forward P/E (below -1.5sd). According to data from the Financial Services Authority (OJK), local equity funds have a high cash level of 14.3% as of May 23; though lower than the previous month's level of 16.6%, it is still higher than the 10-year average of 10.2%.

Impact of China’s monetary policy. The People's Bank of China has recently decided to cut its policy rate by -10 basis points to 2.65% for the 1Y medium-term lending facility rate, 3.55% for the 1Y loan prime rate, and 4.2% for the 5Y loan prime rate, and it plans to extend the 10% value-added tax exemption for electric vehicles, which was originally set to expire in 2023, in an effort to stimulate economic growth. In our opinion, the economic impact of reopening has been quite mixed, but we continue to anticipate a robust recovery. We expect that improving income growth and pent-up demand for activities that were restricted during COVID lockdowns will continue to support growth in 2H23. Given the reasonable valuation, and mid-teens average earnings growth for the stocks in China, there is a risk of foreign flow coming to China. However, it will have a positive effect on Indonesia's trade balances, particularly with regard to our commodity export. If China can maintain a GDP growth rate of 5.5% in 2023, we believe Indonesia's current account deficit will remain under control at -0.1% of GDP.

Overweight for banks, consumer staples, and telco players. We do not change our view and still prefer stocks with strong growth momentum. 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. Also, 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. We maintain our earnings forecast in this report, keeping our fundamental base case scenario index target for 2023F at 7,600 with a P/E of 15.0x. We make no change to our top picks for 2H23, but we believe that the LQ45 rebalancing (Aug-Jan), which will be announced by the end of Jul-23, might provide short-term catalysts for some stocks. Based on our screening, which includes free-float adjusted market capitalization, average daily trading value (ADTV), and trading frequency, we pick BUMI and ADMR as the potential newcomers in LQ45, and JPFA and TINS as the “relegation candidates”.

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