Three trends support OVERWEIGHT sector call. A strong rupiah, subsiding
inflation and strong bank deposit growth point to rising consumption and support the
case for rapid growth of the middle class. The upcoming festive season anchored by
the Muslim New Year in Aug with a full-week holiday in late Aug could turn out to be
a blockbuster for consumer spending. Key beneficiaries are Ramayana, Mitra
Adiperkasa and Gudang Garam (GG). We maintain our OVERWEIGHT on the
consumer sector.
• Currency and consumer confidence. Normally a barometer of confidence for
investors, the rupiah is also a gauge of consumer confidence. The Indonesian
currency has been firming for over two years and recently reached its strongest
level against the US$ since 2003. Its volatility has also dropped sharply, with the
monthly deviation being a mere ±2% over the past 15 months compared with ±10%
in the preceding 24 months. Historically, rupiah strength and stability have boosted
consumer confidence, albeit with a lag. Consumer confidence is closely correlated
to the retail sales index. The bottomline is that rupiah stability and strength bode
well for broad-based consumption growth. We think that GG, Ramayana and Ace
Hardware stand to benefit.
• Inflation and margins. Over the past six years, Indonesia has gone through two
rounds of cost-push inflation in 2005 and 2008 and is currently in its third one.
Consumer companies’ response has generally been to protect market share rather
than margins while increasing prices gradually. Prices are sticky except for some
companies, notably Unilever. This means that margins surge once commodity
prices subside and the impact of the next round of cost increases is usually less
given that selling prices are already set at higher levels. If commodity prices
moderate by 2H, margins should surge. In the past, Mayora and Indofood showed
the sharpest margin rebound once cost pressure subsided.
• Bank deposits and the middle class. Bank deposits rose 18.8% yoy to Rp2,316tr
in Feb 11, equivalent to 33% of GDP. Deposits are still top-heavy, i.e. the rich get
richer faster though those with deposit balances of Rp100m-1,000m (US$11-112k)
grew a robust 11-16% and accounted for a quarter of total deposits. For the 10th
straight month, the number of bank accounts chalked up double-digit growth, rising
10% to over 98m, driven by those with <Rp100m balance. The bank deposit growth
supports World Bank and government data indicating that the middle class has
been growing at over 7m people p.a. This should aid property demand and
discretionary spending. Ciputra, Astra and Mitra Adiperkasa among the key
beneficiaries.
Rupiah and consumer confidence
The Indonesian consumer has not been so confident since the euphoric surge
when Susilo Bambang Yudhoyono (SBY) was first elected president in late 2004. The
consumer confidence index (CCI) has stayed above the threshold 100 points for 24
months, which is the longest on record.
The nominal level and volatility of the rupiah are among the key factors driving
consumer confidence, in our view. The rupiah is currently at its strongest since 2003,
having appreciated against the US$ for some 24 months. Volatility has also subsided
to ±2% on monthly deviation basis over the past 15 months compared with ±10% in
the preceding two years. Simple regression analysis of the Rp/US$ rate and CCI
shows a correlation of 0.24x, which improves to 0.37x when we work in a 6-month lag.
In turn, CCI has historically been a key driver of the retail sales index, showing nearperfect
correlation on a 6-month lag basis. In its Mar survey report on CCI, the central
bank commented that consumer confidence was boosted by higher business
sentiment and income, coupled with an expected lower inflation over the next 3-6
months.
Inflation and margins
Has inflation peaked? Not according to consensus. This view probably hinges on
two variables 1) food prices and 2) fuel subsidy policy. We think that the government
and SBY have been giving enough hints that subsidised fuel prices are unlikely to be
increased this year despite soaring oil prices. Although oil price remains the ultimate
key determinant of the affordability of the subsidy scheme, the government, for now,
appears to be leveraging investors’ appetite for Indonesian bonds and excess funding
from 2010 to fund the additional subsidies. Rupiah appreciation certainly helps. In the
case of food prices, rice is key to the CPI number. The statistics agency forecast a 1-
2% surplus of supply over demand for 2011 while the national logistics agency, Bulog,
appears to have managed inventory much better than last year, which explains the
price stability. The test will come when the grand harvest passes in Apr/May. For now,
rice price is arguably a lower risk than it was last year. The fact that inflation was 2H
heavy last year suggests a high base for 2H11, which may help to bring down yoy
numbers, all else being equal.
Valuation and recommendation
Looking at consumer stocks’ share price performance since a year ago, we note that
Mitra Adiperkasa, Modern and Mayora have outperformed their consumer peers and
the JCI. Both Mitra Adiperkasa and Mayora led mainly due to their significantly lower
valuation than the market which triggered a re-rating of their shares. As for Modern,
the success of its 7-Eleven stores and its aggressive expansion have propelled its
share price to a 3-year high. Laggards in the sector were ICBP and Ramayana. Fear
that rising commodities will weigh on ICBP’s margins hammered its share price late
last year while the failure of Ramayana’s supermarket business model dragged down
its share price.
ICBP, Kalbe and INDF (Indofood) have outperformed the market YTD mainly on the back of
strong margins and impressive earnings growth. At the other end of the spectrum, the
share prices for Ace, Unilever and Ramayana have slipped since the beginning of the
year. Ace’s lower-than-expected same-store sales growth and its higher valuation in
the retail universe were the key reasons for its de-rating since the start of the year.
Similarly, disappointing sales growth last year and UNVR’s premium valuation are
behind its share price downtrend.
No changes in earnings forecasts and OVERWEIGHT on consumer sector.
Our base case assumes more muted growth in 1H and a slight recovery in 2H due to the
high base for inflation in 2H. Implicitly, we are assuming that consumer companies will
absorb the higher cost to maintain market share. This is reflected in our earnings
growth forecast of 14-15% for FY11-12, which is below the market’s estimated 20-
26% growth. Should commodity prices soften more than anticipated in 2H, probably
triggered by potential tightening in the developed countries, it would be good for
Indonesian consumer companies’ margins, similar to the situation in 2009/10. This
would probably spark upgrades. Fundamentals should not be affected much by the
potential outflow of funds due to tightening given the companies’ low gearing and
equally low foreign debt exposure. In a nutshell, there is upside to earnings.
Ramayana, Mitra Adiperkasa and Gudang Garam are the main beneficiaries of the three
trends we have discussed. Ramayana’s geographical reach and target market of the
lower- to middle-income group suggest that the company will benefit from strong mass
consumption growth. Equally, Mitra Adiperkasa’s recent repositioning to the mid- and
mid-up allows the company to capitalise on the burgeoning middle class, in our view.
As for GG, its forte in machine rolled cigarette and consumers’ shifting preference for
machine-rolled cigarettes due to rising disposable incomes suggest that it may
continue to regain market share lost during the hard times in 1998/2005.
source : CIMB and Bloomberg
inflation and strong bank deposit growth point to rising consumption and support the
case for rapid growth of the middle class. The upcoming festive season anchored by
the Muslim New Year in Aug with a full-week holiday in late Aug could turn out to be
a blockbuster for consumer spending. Key beneficiaries are Ramayana, Mitra
Adiperkasa and Gudang Garam (GG). We maintain our OVERWEIGHT on the
consumer sector.
Target price for Consumer sector stocks
• Currency and consumer confidence. Normally a barometer of confidence for
investors, the rupiah is also a gauge of consumer confidence. The Indonesian
currency has been firming for over two years and recently reached its strongest
level against the US$ since 2003. Its volatility has also dropped sharply, with the
monthly deviation being a mere ±2% over the past 15 months compared with ±10%
in the preceding 24 months. Historically, rupiah strength and stability have boosted
consumer confidence, albeit with a lag. Consumer confidence is closely correlated
to the retail sales index. The bottomline is that rupiah stability and strength bode
well for broad-based consumption growth. We think that GG, Ramayana and Ace
Hardware stand to benefit.
• Inflation and margins. Over the past six years, Indonesia has gone through two
rounds of cost-push inflation in 2005 and 2008 and is currently in its third one.
Consumer companies’ response has generally been to protect market share rather
than margins while increasing prices gradually. Prices are sticky except for some
companies, notably Unilever. This means that margins surge once commodity
prices subside and the impact of the next round of cost increases is usually less
given that selling prices are already set at higher levels. If commodity prices
moderate by 2H, margins should surge. In the past, Mayora and Indofood showed
the sharpest margin rebound once cost pressure subsided.
• Bank deposits and the middle class. Bank deposits rose 18.8% yoy to Rp2,316tr
in Feb 11, equivalent to 33% of GDP. Deposits are still top-heavy, i.e. the rich get
richer faster though those with deposit balances of Rp100m-1,000m (US$11-112k)
grew a robust 11-16% and accounted for a quarter of total deposits. For the 10th
straight month, the number of bank accounts chalked up double-digit growth, rising
10% to over 98m, driven by those with <Rp100m balance. The bank deposit growth
supports World Bank and government data indicating that the middle class has
been growing at over 7m people p.a. This should aid property demand and
discretionary spending. Ciputra, Astra and Mitra Adiperkasa among the key
beneficiaries.
Rupiah and consumer confidence
The Indonesian consumer has not been so confident since the euphoric surge
when Susilo Bambang Yudhoyono (SBY) was first elected president in late 2004. The
consumer confidence index (CCI) has stayed above the threshold 100 points for 24
months, which is the longest on record.
The nominal level and volatility of the rupiah are among the key factors driving
consumer confidence, in our view. The rupiah is currently at its strongest since 2003,
having appreciated against the US$ for some 24 months. Volatility has also subsided
to ±2% on monthly deviation basis over the past 15 months compared with ±10% in
the preceding two years. Simple regression analysis of the Rp/US$ rate and CCI
shows a correlation of 0.24x, which improves to 0.37x when we work in a 6-month lag.
In turn, CCI has historically been a key driver of the retail sales index, showing nearperfect
correlation on a 6-month lag basis. In its Mar survey report on CCI, the central
bank commented that consumer confidence was boosted by higher business
sentiment and income, coupled with an expected lower inflation over the next 3-6
months.
Inflation and margins
Has inflation peaked? Not according to consensus. This view probably hinges on
two variables 1) food prices and 2) fuel subsidy policy. We think that the government
and SBY have been giving enough hints that subsidised fuel prices are unlikely to be
increased this year despite soaring oil prices. Although oil price remains the ultimate
key determinant of the affordability of the subsidy scheme, the government, for now,
appears to be leveraging investors’ appetite for Indonesian bonds and excess funding
from 2010 to fund the additional subsidies. Rupiah appreciation certainly helps. In the
case of food prices, rice is key to the CPI number. The statistics agency forecast a 1-
2% surplus of supply over demand for 2011 while the national logistics agency, Bulog,
appears to have managed inventory much better than last year, which explains the
price stability. The test will come when the grand harvest passes in Apr/May. For now,
rice price is arguably a lower risk than it was last year. The fact that inflation was 2H
heavy last year suggests a high base for 2H11, which may help to bring down yoy
numbers, all else being equal.
Valuation and recommendation
Looking at consumer stocks’ share price performance since a year ago, we note that
Mitra Adiperkasa, Modern and Mayora have outperformed their consumer peers and
the JCI. Both Mitra Adiperkasa and Mayora led mainly due to their significantly lower
valuation than the market which triggered a re-rating of their shares. As for Modern,
the success of its 7-Eleven stores and its aggressive expansion have propelled its
share price to a 3-year high. Laggards in the sector were ICBP and Ramayana. Fear
that rising commodities will weigh on ICBP’s margins hammered its share price late
last year while the failure of Ramayana’s supermarket business model dragged down
its share price.
ICBP, Kalbe and INDF (Indofood) have outperformed the market YTD mainly on the back of
strong margins and impressive earnings growth. At the other end of the spectrum, the
share prices for Ace, Unilever and Ramayana have slipped since the beginning of the
year. Ace’s lower-than-expected same-store sales growth and its higher valuation in
the retail universe were the key reasons for its de-rating since the start of the year.
Similarly, disappointing sales growth last year and UNVR’s premium valuation are
behind its share price downtrend.
No changes in earnings forecasts and OVERWEIGHT on consumer sector.
Our base case assumes more muted growth in 1H and a slight recovery in 2H due to the
high base for inflation in 2H. Implicitly, we are assuming that consumer companies will
absorb the higher cost to maintain market share. This is reflected in our earnings
growth forecast of 14-15% for FY11-12, which is below the market’s estimated 20-
26% growth. Should commodity prices soften more than anticipated in 2H, probably
triggered by potential tightening in the developed countries, it would be good for
Indonesian consumer companies’ margins, similar to the situation in 2009/10. This
would probably spark upgrades. Fundamentals should not be affected much by the
potential outflow of funds due to tightening given the companies’ low gearing and
equally low foreign debt exposure. In a nutshell, there is upside to earnings.
Ramayana, Mitra Adiperkasa and Gudang Garam are the main beneficiaries of the three
trends we have discussed. Ramayana’s geographical reach and target market of the
lower- to middle-income group suggest that the company will benefit from strong mass
consumption growth. Equally, Mitra Adiperkasa’s recent repositioning to the mid- and
mid-up allows the company to capitalise on the burgeoning middle class, in our view.
As for GG, its forte in machine rolled cigarette and consumers’ shifting preference for
machine-rolled cigarettes due to rising disposable incomes suggest that it may
continue to regain market share lost during the hard times in 1998/2005.
source : CIMB and Bloomberg
