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July 10, 2015
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH
CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by
Eight, Powered by EFA
INDONESIA STRATEGY
When El Nio comes It is not an if but how strong El Nio will be
when it hits in 2H15. Indonesia will be affected, but the adverse
impact could be muted as it is now less reliant on the primary
sector, and the price gap between domestic and international rice
prices is huge.
Figure 1: El Nio hit the primary sector more than the secondary
or tertiary sectors
Title:
Source:
Please fill in the values above to have them entered in your
report
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Primary Secondary Tertiary GDP growth
Real GDP growth by industry
SOURCES: BPS, CEIC
In other words, a potential hit on GDP growth and inflation
would be manageable. Impact on the equity market could hence be
more positive, albeit slightly, rather than negative, stemming from
the earnings boost on the plantation sector. Key beneficiaries are
AALI and LSIP.
El Nio cometh The potential of El Nio occurring this year has
continued to heighten over the past several months. Some has
predicted that the upcoming El Nio has the potential to be as
severe as the one in 1997/98. As there have been many false alarms
in the past years, the consensus expects a moderate El Nino this
time. In the past, El Nio brought significant decrease in rainfall
through most of Indonesia, hitting food crop harvests, hiking food
prices. Key commodities affected are rice, cooking oil and some
spices.
Economic impact A recent study by the IMF forecasted that is the
El Nio deviates by -1 s.d., Indonesias GDP growth could dip by
0.35% and its inflation rise by 0.25%. A severe El Nio is in the
order of -5 to -6 s.d. The impact might be more
muted this time given: 1) the lower contribution of the primary
sector such as agriculture, forestry, fishery and mining to the
economy, at 19% vs. the pre-1998 average of 25%; 2) significant
price gap between domestic and international rice prices, hence
allowing for greater scope for inflation management; 3) a more
assertive government in terms of staple food price stabilisation.
In any case, we believe growth downside risk is keener in 2016,
with inflation pressure likely to pick up by end-2015.
Market impact The moderate El Nio occurrences in the past had
insignificant impact on the market. Based on its impact to growth
as projected in IMF's working paper, we believe the market has not
priced in the downside risk of the El Nino coming in at the 97/98
scale. Indonesia is more politically stable and the government has
more financial heft than in 97/98 to manage the impact. If the
inflation impact is manageable, impact on the market will be as
muted, while the plantation sector will reap the windfall,
regardless, in our view.
Lor Sources: CIMB. COMPANY REPORTS
Notes from the Field
Erwan TEGUH T (62) 21 30061720 E [email protected]
Peter P. SUTEDJA, CFA T (62) 21 30061726 E
[email protected]
Show Style "View Doc Map"
Effects of the El Nio phenomenon are expected to be moderate. If
we prepare well, we will not have to import food
Jusuf Kalla, Vice President of Republic of Indonesia
Highlighted Companies
Adaro Energy
ADROs strong track record in delivering efficiency measures
offers investors comfort amid increasing margin pressure. Catalysts
could come from progress in its power plant projects.
Astra Agro Lestari
AALI stands out among the Indonesian planters as a proxy for CPO
prices due to its liquidity (the highest), palm oil estate size
(the largest planted area) and its downstream exposure (beneficiary
of the export levy).
London Sumatra
LSIPs current EV/ha of US$8.2k/ha is lagging behind its peers
average of US$9.6k/ha following news of a possible severe El Nino.
This should lend support to its share price.
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Strategy Indonesia
July 10, 2015
2
KEY CHARTS
El Nio comes The Australian Bureau of Meteorology (BOM),
together with other weather forecasters, have all but confirmed
that the El Nio weather phenomena has occurred and may worsen over
the next several months. Some areas have indeed recorded drought.
If the weather pattern changes as predicted, a prolonged drought in
the western Pacific may happen. Severe cases of El Nio in the past,
back in 1997/98 and 1982/83, brought significant decrease in
rainfall throughout the regions in Indonesia, resulting in bad
harvest and spike in food prices.
-30
-20
-10
0
10
20
30
Jan
-76
Ma
y-7
7
Se
p-7
8
Jan
-80
Ma
y-8
1
Se
p-8
2
Jan
-84
Ma
y-8
5
Se
p-8
6
Jan
-88
Ma
y-8
9
Se
p-9
0
Jan
-92
Ma
y-9
3
Se
p-9
4
Jan
-96
Ma
y-9
7
Se
p-9
8
Jan
-00
Ma
y-0
1
Se
p-0
2
Jan
-04
Ma
y-0
5
Se
p-0
6
Jan
-08
Ma
y-0
9
Se
p-1
0
Jan
-12
Ma
y-1
3
Se
p-1
4
Southern Oscillation Index
La Nia
El Nio
More resilient to growth risk Based on previous cases of El Nio,
IMF calculated that Indonesias GDP growth will fall by 0.91% at the
end of the second quarter after El Nio strikes. The growth impact
is indeed large; however, this is because Indonesia was
historically more economically dependent on the agriculture sector.
With the primary sectors (agricultural and mining) contribution to
real economy declining to 19% by 2014 (as opposed to 27% in 1998
and 44% in 1983), the adverse impact could be more diluted this
time. The countrys better financial position, as well as higher
income per capita and more stable politics provide scope to manage
the risks better.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Primary Secondary Tertiary
Real GDP contributor by industry
Inflation pains more manageable The bigger risk to the economy
would come from inflation spikes, given foods still-heavy weighting
in Indonesias CPI basket. As such, spikes in food prices could
adversely impact inflation. Among the key commodities that
contribute to the CPI, rice is the most importance given its weight
in CPI and its political repercussion. The big premium that
Indonesian rice price fetches domestically over international price
buffers the impact should a strong El Nio hit, as the government
could allow imports to flow in, cushioning the domestic price
spike. Additionally, the wider range of food staples placed under
the responsibility of its national logistics agency Bulog, and the
recent presidential decree to control staple food prices in unusual
situations, provide more legal tools for the government to manage
price volatilities.
0%
5%
10%
15%
20%
25%
General Food Non-Food
yoy inflation
Market impact If a severe El Nio was to hit and the economic
impact is as predicted by IMF, impact on the market could be
severe, stemming from earnings risk. The mild El Nio episodes in
2002/03, 2006/07 and 2009-2010 had insignificant impact on market
valuations. While the market is pricing in a bearish expectation,
it has yet to factor in a strong El Nio outcome. In any case, the
plantation sector is a hedge. The key risk to such play is
regulation, such as if the government decides to impose higher
export tax, as happened in 97/98.
-
50
100
150
200
250
300
350
400
0x
5x
10x
15x
20x
25x
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
JCI P/E JCI EPS (RHS)
El Nino period
SOURCE: CIMB, COMPANY REPORTS
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July 10, 2015
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Figure 2: Thematic picks
Price Target Price
(local curr) (local curr) CY2015 CY2016 CY2015 CY2016 CY2014
CY2015 CY2016 CY2015 CY2016 CY2015 CY2016
El Nio plays
Astra Agro Lestari AALI IJ HOLD 25,500 26,000 3,012 22.7 15.5
-0.9% 3.30 2.89 23.2% 15.6% 19.9% na na 2.1% 1.6%
London Sumatra LSIP IJ HOLD 1,565 1,670 801 18.5 14.8 -5.8% 1.45
1.36 14.2% 8.2% 9.5% na na 2.0% 2.6%
Average 21.7 15.4 -2.0% 2.60 2.34 19.6% 12.8% 16.0% na na 55.6%
55.3%
Infrastructure plays
Indocement INTP IJ ADD 21,000 28,600 5,798 14.4 11.7 2.3% 2.89
2.60 22.2% 21.3% 23.3% 8.5 7.1 4.3% 4.6%
Pembangunan Perumahan PTPP IJ ADD 3,985 4,800 1,447 26.7 18.4
24.8% 6.44 4.96 25.4% 27.7% 30.5% 10.7 8.3 0.6% 0.8%
Waskita Karya WSKT IJ ADD 1,770 2,100 1,857 25.5 18.4 39.5% 2.69
2.40 20.3% 14.3% 13.8% 8.0 5.6 0.6% 1.0%
Jasa Marga JSMR IJ ADD 5,700 6,800 2,907 22.8 18.7 18.5% 3.59
3.24 15.5% 16.6% 18.3% 12.3 11.4 2.0% 2.4%
Bank Mandiri BMRI IJ HOLD 9,900 11,700 17,324 11.5 9.9 3.7% 1.94
1.67 20.4% 18.4% 18.1% na na 2.2% 2.3%
Bank Negara Indonesia BBNI IJ ADD 5,350 7,700 7,482 9.0 7.9 5.9%
1.44 1.23 19.4% 17.7% 16.7% na na 2.7% 3.0%
Average 12.2 10.5 5.5% 2.06 1.78 20.2% 18.5% 18.3% 30.8 25.5
2.5% 2.7%
Long-term consumer plays
Gudang Garam GGRM IJ HOLD 45,625 54,600 6,584 16.2 14.9 3.2%
2.42 2.20 17.9% 15.9% 15.5% 9.6 9.0 2.5% 2.7%
Malindo Feedmill MAIN IJ ADD 1,570 1,850 211 25.9 11.2 -16.0%
2.32 1.97 -6.1% 9.4% 19.0% 11.1 7.5 0.0% 1.1%
Metropolitan Land MTLA IJ ADD 365.0 650.0 207 9.0 7.2 9.3% 1.26
1.10 15.4% 15.4% 16.3% 5.6 4.5 1.9% 2.2%
Nippon Indosari Corpindo ROTI IJ ADD 1,140 1,700 433 22.1 17.8
17.7% 4.92 4.03 22.2% 25.0% 24.8% 11.7 10.1 0.8% 1.1%
Surya Citra Media SCMA IJ ADD 2,970 3,700 3,257 27.7 22.9 5.5%
10.30 8.27 49.1% 41.9% 40.1% 17.9 15.1 1.8% 2.0%
Indofood Sukses Makmur INDF IJ ADD 6,600 7,900 4,346 13.2 11.7
5.9% 2.08 1.90 16.3% 16.9% 17.0% 8.2 7.6 3.4% 3.8%
Matahari Putra Prima MPPA IJ HOLD 2,860 4,350 1,154 26.4 21.3
24.1% 4.71 4.03 16.6% 19.7% 20.4% 12.5 10.5 1.1% 1.1%
Average 17.1 15.0 5.1% 2.83 2.54 18.4% 17.8% 17.9% 9.8 8.9 2.4%
2.7%
Property & Industrial plays
Bekasi Fajar BEST IJ ADD 428.0 800.0 310 7.6 5.3 -7.8% 1.24 1.03
15.6% 18.1% 21.1% 6.3 4.4 1.9% 2.7%
Bumi Serpong Damai BSDE IJ ADD 1,720 2,200 2,483 11.6 9.1 0.8%
1.82 1.56 21.6% 17.2% 18.4% 10.3 8.3 2.4% 1.7%
Pakuwon Jati PWON IJ ADD 400.0 625.0 1,445 10.7 8.7 12.6% 2.58
2.05 29.8% 27.3% 26.2% 7.5 6.3 2.6% 1.9%
Summarecon Agung SMRA IJ ADD 1,770 1,900 1,915 19.2 15.8 4.7%
3.99 3.35 29.4% 23.1% 23.0% 11.8 10.5 1.6% 1.6%
Surya Semesta Internusa SSIA IJ ADD 900.0 1,270 318 8.5 5.7
-1.3% 1.39 1.16 11.1% 18.0% 22.3% 5.0 4.1 2.0% 2.2%
Average 12.3 9.6 2.8% 2.25 1.88 23.0% 20.3% 21.4% 9.1 7.5 2.2%
1.8%
Average (all) 13.3 11.3 5.0% 2.25 1.95 20.0% 18.5% 18.5% 15.8
13.7 2.4% 2.6%
P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield
(%)Company
Bloomberg
TickerRecom.
Market Cap
(US$ m)
Core P/E (x) 3-year EPS
CAGR (%)
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG
Calculations are performed using EFA Monthly Interpolated
Annualisation and Aggregation algorithms to December year ends
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Strategy Indonesia
July 10, 2015
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Beating the heat 1. BACKGROUND
1.1 The El Nio phenomena
On 12 May 2015, the Bureau of Meteorology (BOM), Australia's
national weather, climate and water agency, declared the El Nio
status. El Nio episode is characterised by changes in the usual
weather pattern, i.e. drought in the western Pacific, rains in the
equatorial coast of South America, and convective storms and
hurricanes in the central Pacific. These changes in weather
patterns have significant effects on agriculture, fishing, and
construction industries, as well as on national and global
commodity prices.
Figure 3: Southern Oscillations the normal pattern Figure 4: El
Nio condition
SOURCES: PIDWIRNY, M (2006) SOURCES: PIDWIRNY, M (2006)
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Strategy Indonesia
July 10, 2015
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Figure 5: Global climatological effects of El Nio
SOURCES: NATIONAL ATMOSPHERIC AND OCEANIC ADMINISTRATIONS (NOAA)
CLIMATE PREDICTION CENTER
One of the ways of measuring El Nio intensity is by using the
Southern Oscillation index (SOI), which is issued by the BOM.
Sustained negative SOI values below -8 indicate El Nio episodes,
which typically occur at intervals of three to seven years and
lasts about two years.
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Strategy Indonesia
July 10, 2015
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Figure 6: Southern Oscillation Index now entering El Nio
episode
Title:
Source:
Please fill in the values above to have them entered in your
report
-30
-20
-10
0
10
20
30
Jan-9
7
Jul-97
Jan-9
8
Jul-98
Jan-9
9
Jul-99
Jan-0
0
Jul-00
Jan-0
1
Jul-01
Jan-0
2
Jul-02
Jan-0
3
Jul-03
Jan-0
4
Jul-04
Jan-0
5
Jul-05
Jan-0
6
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Jan-1
0
Jul-10
Jan-1
1
Jul-11
Jan-1
2
Jul-12
Jan-1
3
Jul-13
Jan-1
4
Jul-14
Jan-1
5
Southern Oscillation Index
La Nia
El Nio
SOURCES: BOM Australia
The Indonesian Agency for Meteorological, Climatological and
Geophysics (BMKG) predicts that the El Nio phenomenon this time
would be classified as a moderate instance, as opposed to the
strong instance observed during 1982/83 and 1997/98. The El Nio
impact is not expected to change the rainfall pattern during
Indonesias dry season in Jun-Nov, while stronger impact could be
observed beyond Nov, which could result in the late start of the
2015/16 rainy seasons. The area affected, according to BMKG would
include part of Sumatra island (South Sumatra and Lampung
provinces), Java and Bali island, Nusa Tenggara area and part of
Sulawesi island (South Sulawesi and Southeast Sulawesi
provinces).
Figure 7: Areas potentially affected by El Nio
SOURCES: INDONESIAN AGENCY FOR METEOROLOGICAL, CLIMATOLOGICAL
AND GEOPHYSICS
1.2 Prolonged drought hit harvest
The most severe El Nio cases observed in the past were in
1982-83 and 1997-98 it had large adverse macroeconomic effects in
many regions of the world. In Indonesias case, both events resulted
in significant decrease in rainfall, particularly during the dry
season, which occurred from May to August (at that time). The
decrease of rainfall observed back in 1982 was -17.3% and -44% for
wet and dry seasons, respectively, in 1982; and -30.8% and -62.2%
for wet and dry seasons in 1997. The negative SOI occurred for 13
and 14 months, respectively, during similar periods, i.e. from
March/April until May/June, while the large negative SOI (which
suggests the period of El Nio) lasted for 11 months. The other El
Nio episodes were relatively moderate, as in the case of 1986-88,
1991-92, 1993, 1994-95, 2002-03, 2006-07, and 2009-10.
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July 10, 2015
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Figure 8: Rainfall drop in 1982 and 1997 compared with average
rainfall 1970-1997 by season and by region (%)
Wet season Dry season All seasons Wet season Dry season All
seasons
Sumatra -38.3 -46.4 -40.9 -18.8 -35.2 -24.0
Java -33.4 -76.8 -41.2 -11.9 -81.7 -24.4
Bali / Nusa Tenggara -26.5 -78.5 -32.0 -26.4 -90.8 -33.2
Kalimantan -32.5 -54.4 -39.9 -5.7 -37.8 -16.1
Sulawesi -30.7 -70.2 -40.9 -18.5 -24.4 -27.4
Indonesia -33.3 -56.2 -39.9 -17.2 -39.6 -23.7
Province
1997 1982
SOURCES: THE UNITED NATIONS
During the 1982 and 1997 episodes, the decrease in rainfall
forced farmers to harvest their food crops earlier in order to
avoid harvest failure from water insufficiency. The long dry season
caused by El Nio, particularly in 1997, resulted in late harvest
for the next seasons food crops, resulting in farmers harvesting
food crops later than the normal harvest pattern in 1998. This
strategy, however, resulted in lower yield and poor quality, which
were reflected in less area harvested and poor yields during El Nio
episodes.
Figure 9: Food crops area harvested in Indonesia during
1982-1983 and 1997-1998 El Nio, compared with 3-year moving
average
Wetland
rice
Dryland
rice
Corn Cassava Groundnut Sweet
Potato
Soybean Total
Crops
Area decrease ('000 ha)
1982 -367 -82 -507 -91 -45 -27 -133 -1,254
1983 -308 -97 -72 -111 -40 -12 -81 -721
1997 -398 -82 -303 -113 -68 -16 -196 -721
1998 -305 -109 -54 -114 -57 -13 -142 -792
Area decrease (%)
1982 -4.5 -7.1 -22.0 -6.7 -9.0 -12.2 -18.3 -8.6
1983 -3.8 -8.4 -3.0 -8.5 -8.2 -5.7 -11.7 -5.0
1997 -4.0 -6.3 -8.6 -8.7 -10.1 -9.2 -15.3 -6.4
1998 -3.0 -8.7 -1.5 -8.9 -8.8 -7.3 -12.0 -4.3 SOURCES: CIMB,
COMPANY REPORTS
In 1997/98, the longer dry season in 1997 coincided with the wet
season in 1998, leading to a severe decrease in rice production.
The government then intervened heavily by conducting an open market
operation programme via rice imports. That the Asian Financial
Crisis occurred simultaneously limited the governments ability to
conduct price stability intervention. All this led to severe
economic contraction and sharply higher poverty level. Java was
worst hit as it accounts for the bulk of Indonesias rice production
and also happens to be the area worst hit by any El Nio effect.
Figure 10: Supply-demand of domestic rice during 1997/98 El Nio
notice the period of low domestic supply in end-97 and 98.
Title:
Source:
Please fill in the values above to have them entered in your
report
0
500
1000
1500
2000
2500
3000
0
500
1000
1500
2000
2500
3000
I II III I II III I II III I II III
1996 1996 1996 1997 1997 1997 1998 1998 1998 1999 1999 1999
Domestic procurement Import Market operation Rice price
(RHS)
'000 ton Rp/kg
SOURCES: BULOG
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Strategy Indonesia
July 10, 2015
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The drought also led to lower outputs by most of the other major
crops. While CPO yield was also adversely affected in 1997/98,
production continued to rise due to the aggressive palm oil
planting programme supported by the government prior to that. Prior
to 1997, the majority of the CPO produced in Indonesia was exported
(given the 0% taxation at that time) and much lower domestic
demand.
The sharp rupiah depreciation and the shortage of domestic
cooking oil supply led to a sharp rise in cooking oil prices in
rupiah terms. The government responded by enacting a 25% mandatory
domestic sales obligation on CPO companies in 1997, which failed to
resolve the surge in cooking oil prices and eventually passed a
draconian act of banning CPO exports briefly from Jan-Apr 1998.
This was also the period when the Indonesian government frequently
changed the export tax regime and hence the plantation sector was
perceived to be carrying high regulatory risks.
Figure 11: Plantation output by crop in Indonesia (in tonnes),
1995-2014
Dry rubber CPOPalm
KernelCocoa Coffee Tea Sugarcane 1) Tobacco 1)
1995 341 2,476 605 46 21 111 2,105 10
1996 335 2,570 627 47 27 132 2,160 7
1997 331 4,166 839 66 31 121 2,187 8
1998 333 4,586 917 61 29 133 1,929 8
1999 294 4,908 982 59 27 126 1,801 6
2000 376 5,095 1,019 58 28 123 1,780 6
2001 398 5,598 1,118 58 27 127 1,825 5
2002 404 6,196 1,210 48 27 120 1,901 5
2003 396 6,924 1,529 57 29 128 1,992 5
2004 404 8,479 1,862 55 29 126 2,052 3
2005 432 10,119 2,140 55 25 128 2,242 4
2006 555 10,962 2,363 67 29 115 2,307 4
2007 578 11,438 2,593 69 24 117 2,624 3
2008 586 12,478 2,829 63 28 113 2,668 3
2009 522 13,873 3,146 68 29 107 2,334 4
2010 541 14,038 3,183 65 29 100 2,289 3
2011 630 15,198 3,446 68 22 95 2,244 2
2012 583 16,818 3,364 53 29 92 2,593 2
2013 670 17,391 3,648 55 30 96 2,555 3
2014 533 18,401 5,088 47 44 77 1,784 3
1Q15 109 4,186 1,059 7 1 15 - 1
1) Including production from plasma estates SOURCES: CIMB,
COMPANY REPORTS
Despite the production impact, there were hardly visible impacts
of El Nio in the 2000s era, as only weak to moderate instances
occurred. There were food inflation spikes in the 2002/03, though
that could be a function of a series of fuel price adjustments
during the period, as domestic rice prices were relatively stable,
despite cooking oil prices increasing during the period (in tandem
with oil price surges). Increase in food prices were observed in
both 2006/07 and 2009/10 periods i.e. for rice prices, though that
did not translate into a spike in food inflation given the high
base effect from the previous years (2005 and 2008) fuel price
hike.
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July 10, 2015
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Figure 12: Muted inflation impact during several weak to
moderate El Nio episodes in the 2000s, despite food being the major
contributor to inflation during those
periods
Title:
Source:
Please fill in the values above to have them entered in your
report
-
5
10
15
20
25
Food Non-Food
%, yoy inflation
SOURCES: CEIC, BPS
Figure 13: Rice price some spikes observed during El Nio Figure
14: Cooking oil price spikes coincident with CPO and oil price
spikes.
Title:
Source:
Please fill in the values above to have them entered in your
report
-100%
-50%
0%
50%
100%
150%
200%
0
200
400
600
800
1,000
1,200
1,400
Jan-9
7
Oct-97
Jul-98
Apr-
99
Jan-0
0
Oct-00
Jul-01
Apr-
02
Jan-0
3
Oct-03
Jul-04
Apr-
05
Jan-0
6
Oct-06
Jul-07
Apr-
08
Jan-0
9
Oct-09
Jul-10
Apr-
11
Jan-1
2
Oct-12
Jul-13
Apr-
14
Jan-1
5
Premium (discount) to international price (RHS)
Indonesia rice price, US$/tonne
Thailand rice price, US$/tonne
Title:
Source:
Please fill in the values above to have them entered in your
report
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-9
8
Oct-98
Jul-99
Apr-
00
Jan-0
1
Oct-01
Jul-02
Apr-
03
Jan-0
4
Oct-04
Jul-05
Apr-
06
Jan-0
7
Oct-07
Jul-08
Apr-
09
Jan-1
0
Oct-10
Jul-11
Apr-
12
Jan-1
3
Oct-13
Jul-14
Apr-
15
Premium (discount) to international price (RHS)
Indonesia cooking oil price, US$/tonne
Malaysia cooking oil price, US$/tonne
SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY
REPORTS
2. OUTLOOK
2.1 Growth impact downside risk if strong El Nio hits
The IMF in its 2015 Working Paper on the Macroeconomics Impact
of El Nio quantified the macro impact of El Nio on countries. The
study showed that an El Nio event had a statistically significant
effect on real GDP growth and inflation for most of the countries
in the sample. The median responses on impact as well as the
cumulated effects for both macro indicators for Indonesia after the
first, second, third, and fourth quarters are shown in Figure 14.
Based on the study, the Indonesian GDP growth could fall by 0.91%
at the end of the second quarter, about 1% cumulatively during the
event. This is a large growth dent, in fact the worst among the
countries under the study. In part, this was due to the higher
share of primary sector (agricultural and mining) in the Indonesian
GDP composition (c.25% average in 2004-2013), and that Indonesia is
a net importer of most of key food stuff.
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Strategy Indonesia
July 10, 2015
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Figure 15: The effects of an El Nio shock on Indonesia real GDP
growth
1 quarter 2 quarter 3 quarter 4 quarter
Argentina -0.08 0.03 0.29 0.64 1.08
Australia -0.03 -0.18 -0.30 -0.37 -0.41
Brazil -0.06 0.04 0.20 0.42 -0.68
Canada 0.00 0.13 0.33 0.58 0.85
China -0.01 0.03 0.16 0.36 0.56
Chile -0.19 -0.10 0.16 0.42 0.70
Europe 0.02 0.09 0.27 0.49 0.69
India -0.03 -0.15 -0.23 -0.25 -0.25
Indonesia -0.35 -0.61 -0.91 -1.02 -1.01
Japan -0.10 -0.12 0.01 0.20 0.37
Korea 0.11 0.29 0.44 0.58 0.67
Malaysia 0.08 0.06 0.13 0.27 0.43
Mexico 0.03 0.37 0.71 1.12 1.57
New Zealand -0.16 -0.29 -0.37 -0.42 -0.43
Peru -0.07 -0.28 -0.35 -0.34 -0.33
Philippines 0.06 0.09 0.11 0.17 0.21
South Africa -0.11 -0.24 -0.47 -0.63 -0.72
Saudi Arabia -0.09 -0.17 -0.14 0.00 0.18
Singapore 0.09 0.28 0.54 0.87 1.18
Thailand 0.47 0.78 1.11 1.49 1.81
USA 0.05 0.10 0.23 0.39 0.55
Cummulated responses after
Note: Figures are median impulse responses to a one standard
deviation reduction in SOI anomalies.
ImpactCountry
SOURCES: IMF
The table above calculated the impact to the economy for every 1
s.d. reduction in SOI anomalies, which was defined as the deviation
of the SOI index from its historical average, divided by its
historical standard deviation (s.d.). Using the same study, the
most severe cases of El Nio observed a 4 to 6 s.d. below SOI
anomalies, while the mild to moderate El Nio historically has SOI
anomalies index of -1 to -2s.d. If the El Nio episode this time is
moderate, the initial GDP impact on Indonesia could range between
0.35% and 0.70%, assuming all else being equal.
Figure 16: Historical SOI anomalies index
SOURCES: IMF WORKING PAPER
In the case of a severe El Nio, the growth impact could be
damaging. Based on the IMFs working paper, GDP growth could be hit
by 1.4-2.1%, which was seen in 1982/83 and 1997/98, as the primary
sectors growth dipped into negative territory in both years,
dragging down the overall GDP. The impact in the 1997/98 case was
exacerbated by the Asian Financial Crisis.
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Figure 17: The El Nio shock dragged down primary industry growth
into contraction in both 1982/83 and 1997/98; however, the impact
in the latter case was
worsened by the Asian Financial Crisis.
Title:
Source:
Please fill in the values above to have them entered in your
report
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Primary Secondary Tertiary GDP growth
Real GDP growth by industry
SOURCES: CEIC, GDP
On a more positive note, the share of the primary industry, in
recent years, has declined, contributing only 19% to the real
economy in 2014, from 44% in 1983 and 27% in 1998, as contributions
from secondary (manufacturing) and tertiary (services sector)
picked up. Also, GDP per capita has risen from US$622-1,079 in
82/97 to US$3,515 as of 2014, suggesting reduced reliance on food
staples and hence more resilience to food price shocks. Combined
with the indication so far that the El Nio this time would be less
severe than in 1983 and 1998, the logical deduction is that its
impact on economic growth this time around could be smaller. This
is supported by the insignificant impact to growth during the
moderate El Nio episodes over the past decade.
Adjusting to the lower primary sector exposure, the initial
impact on economic growth could be in the range of 0.5-1.3%, i.e.
from moderate to severe El Nino outcomes.
Figure 18: The contribution of primary industry has declined
over time, therefore this time the impact on agriculture slowdown
in times of El Nio shock should be diluted
Title:
Source:
Please fill in the values above to have them entered in your
report
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Primary Secondary Tertiary
Real GDP contributor by industry
SOURCES: CEIC, BPS
2.2 Inflation risk more manageable
The IMF working paper also computed the inflationary effect of
El Nio shocks to countries. It found that for most countries in its
sample, there existed statistically-significant upward pressure on
inflation, due to higher fuel as well
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as non-fuel commodity prices, and also the result of government
policies (including buffer stock releases), inflation expectations,
as well as aggregate demand-side pressures for countries that
experience a growth pick-up following an El Nio episode. Indonesia
was predicted to see one of the highest jumps in inflation, in fact
highest among Asian countries. This was due to the higher weight
placed on food in Indonesias CPI basket. In case of a moderate El
Nio, the study showed that it could contribute an additional
0.25-0.50% yoy to inflation. Under the worst case, should a strong
El Nio occur, it could bump inflation up by 1-1.5% yoy.
Figure 19: The effects of an El Nio shock on Indonesias
inflation
1 quarter 2 quarter 3 quarter 4 quarter
Argentina 0.51 0.79 0.57 0.92 0.64
Australia -0.01 0.02 0.02 0.01 0.00
Brazil -0.30 -0.21 1.01 1.49 0.97
Canada -0.05 -0.10 -0.08 -0.07 -0.07
China 0.00 -0.02 0.00 0.06 0.11
Chile 0.14 0.14 0.29 0.32 0.39
Europe 0.00 0.00 0.02 0.06 0.09
India 0.15 0.16 0.42 0.56 0.60
Indonesia 0.25 0.61 0.87 0.95 0.91
Japan 0.03 0.05 0.04 0.06 0.10
korea 0.01 0.12 0.22 0.34 0.44
Malaysia 0.05 0.09 0.16 0.23 0.28
Mexico 0.22 0.60 1.01 1.12 1.04
New Zealand -0.06 -0.23 -0.39 -0.55 -0.61
Peru -0.06 -0.73 -0.48 -0.38 0.65
Philippines 0.11 0.06 0.19 0.22 0.27
South Africa 0.10 -0.01 0.02 0.06 0.09
Saudi Arabia 0.01 -0.03 -0.02 -0.01 -0.02
Singapore -0.07 -0.06 -0.06 -0.06 -0.06
Thailand 0.01 0.21 0.35 0.46 0.55
USA 0.01 0.02 0.10 0.14 0.15
Cummulated responses after
Note: Figures are median impulse responses to a one standard
deviation reduction in SOI anomalies.
ImpactSeries
SOURCES: IMF
In Indonesia, food inflation (both raw and processed food)
accounted for 36% of the CPI basket over the past five years vs.
more than 44% previously. This renders the headline inflation
vulnerable to shocks in food prices, which historically was either
triggered by 1) transmission effect from subsidised fuel price cut,
and/or 2) bad harvest, as in the case of the food inflation in
2010.
Figure 20: Top 10 inflation contributors El Nio observed in
2006/07 notice that rice tops the inflation contributors during
those years
Items (% yoy) 2005 Items (% yoy) 2006 Items (% yoy) 2007 Items
(% yoy) 2008
1 Inner-city transport fares 2.79 Rice 1.63 Rice 0.52 Household
fuel 1.16
2 Gasoline 2.61 Contract housing 0.42 Cooking oil 0.49
Inner-city transport fares 0.69
3 Kerosene 1.61 House rental 0.22 Shallot 0.47 Fish 0.68
4 Rice 1.24 Cooked rice with side dish 0.22 Gold jewellery 0.33
Gasoline 0.57
5 Contract housing 0.51 Gold jewellery 0.19 Contract housing
0.30 Cooked rice with side dish 0.36
6 Cooked rice with side dish 0.45 Fish 0.19 Clove cigarette -
with filter 0.24 Rice 0.31
7 Red chilli 0.40 Academy/University tuition fee 0.16
Academy/University tuition fee 0.17 Gold jewellery 0.30
8 Inter-city transport fares 0.27 Clove cigarette - with filter
0.16 Chicken meat 0.16 Chicken meat 0.28
9 Clove cigarette - with filter 0.26 Red chilli 0.15 Water
utilities cost 0.15 Noodle 0.26
10 Mason fee 0.24 Chicken meat 0.15 Chicken eggs 0.13 Tempeh
0.25
Top 10 inflation contribution (% yoy) 10.38 3.49 2.96 4.86
Headline inflation (% yoy) 17.11 6.60 6.59 11.06 SOURCES:
BPS
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Figure 21: Top 10 inflation contributors 2009/10 was the year
where El Nio was observed, food tops the inflation contributor
Items (% yoy) 2009 Items (% yoy) 2010 Items (% yoy) 2011 Items
(% yoy) 2012
1 Sugar 0.32 Rice 1.29 Rice 0.54 Rice 0.30
2 Gold jewellery 0.28 Electricity 0.36 Gold jewellery 0.34 Fish
0.22
3 Rice 0.27 Red Chilli 0.32 Clove cigarette - with filter 0.22
Clove cigarette - with filter 0.20
4 Garlic 0.18 Gold jewellery 0.27 House rental 0.21 Gold
jewellery 0.19
5 Clove cigarette - with filter 0.14 Shallot 0.25 Air transport
fee 0.19 Air transport fee 0.19
6 Cooked rice with side dish 0.14 Rice with cooked food 0.24
Fish 0.18 Meat 0.17
7 Contract housing 0.13 Chili - small variety 0.22 High school
fee 0.10 Sugar 0.15
8 House rental 0.13 Road tax renewal fee 0.22 Contract housing
0.09 House rental 0.15
9 Air transport fee 0.11 Clove cigarette - with filter 0.16
Cooked rice with side dish 0.08 White onion 0.14
10 Noodle 0.09 Chicken meat 0.15 Chicken eggs 0.07 House rental
0.13
Top 10 inflation contribution (% yoy) 1.79 3.48 2.02 1.84
Headline inflation (% yoy) 2.78 6.96 3.79 4.30 SOURCES: BPS
Figure 22: Top 10 inflation contributors in 2013 and 2014
Items (% yoy) 2013 Items (% yoy) 2014
1 Gasoline 1.17 Gasoline 1.04
2 Inner-city transport fares 0.75 Electricity 0.64
3 Red Onion 0.38 Inner-city transport fares 0.63
4 Electricity 0.38 Red chilli 0.43
5 Red Chilli 0.31 Rice 0.38
6 Fish 0.30 Household fuel 0.37
7 Rice 0.20 Air transport fee 0.22
8 Cooked rice with side dish 0.20 Chili - small variety 0.19
9 Contract housing 0.20 Cooked rice with side dish 0.18
10 Clove cigarette - with filter 0.19 Clove cigarette - with
filter 0.15
Top 10 inflation contribution (% yoy) 4.08 4.23
Headline inflation (% yoy) 8.38 8.36 SOURCES: BPS
Given that rice is widely consumed across Indonesia and carried
significant weight in the CPI (cereals has over 20% weight in the
unprocessed food basket), it has consistently become one of the key
contributors to the CPI. As such, it would be crucial for the
government to ensure the stability of rice supply. The task is made
easier given the fact that Indonesian rice price commands premium
over international rice price (currently at 140% premium to
Thailand rice price), meaning that the government can contain rice
price spike effectively by importing rice during times of domestic
supply shortfall, ensuring that demand could be met and preventing
food inflation spike.
2.3 Commodities price impact higher
Prolonged droughts lead to bad harvests, pushing up the prices
of coffee, cocoa, and palm oil, among other commodities. Not
helping is that some mines in Indonesia (particularly INCO) rely
heavily on hydropower; resulting in less nickel output due to power
shortage. Subsequently, certain metal prices were affected due to
supply hit. In the IMF study, the hit on Indonesias GDP growth of
-0.91% at the end of the second quarter after El Nino hit was a
large part due to the higher share of the primary sector
(agricultural and mining), at around 25% of total GDP.
Prolonged drought could also lead to higher demand for coal and
crude oil as lower electricity output is generated from hydropower.
In addition, the agriculture sector might extract more water which
would further increase the fuel demand for power generation. The
IMF study in fact confirmed that crude oil prices (as a proxy for
fuel prices) also sustained a statistically significant and
positive change following an El Nio shock.
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Figure 23: The effects of an El Nio shock on real commodity
prices (in %)
1 quarter 2 quarter 3 quarter 4 quarter
Non-fuel commodity prices 0.42 0.77 1.97 3.75 5.31
Oil prices 1.20 4.23 7.80 11.09 13.87
Cummulated responses after
Series Impact
SOURCES: IMF
CPO is among the key beneficiary commodities as its production,
mainly in Indonesia and Malaysia, would be adversely affected,
while its use as both food and biodiesel might see higher demand.
Such demand-supply imbalances push up CPO prices. CIMBs plantation
analyst forecast price spikes of c.20-25% under a moderate El Nino
episode, after taking into account the higher inventory, relatively
robust harvest of other edible oils and lower crude oil prices. She
forecasts FY15-16 CPO prices of RM2,230-2,450/tonne, which has
already assumed a moderate El Nio event but her rough estimates
reveal that in the event of a more severe El Nio, CPO prices could
rise by 20% to peak at RM2,700/tonne.
The CPO price normally strengthened at the end of El Nio, as the
reduced production starts being felt. The future prices of the
commodities have already moved ahead, as shown in Fig.23.
Figure 24: CPO vs. soybean oil futures prices
Title:
Source:
Please fill in the values above to have them entered in your
report
0
10
20
30
40
50
60
70
80
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Jan-14
CPO (LHS) Soybean oil (RHS)(RM/tonne) (US cent/lb)
El Nino:May'97 - Apr'98
El Nino:May'02 - Feb'03
El Nino:Jul'04 - Jan'05
El Nino:Sep'06 - Jan'07
El Nino:Jul'09 - Apr'10
SOURCES: CIMB, BLOOMBERG
Figure 25: Price changes during ENSO cycle
Type Period Intensity % chg in CPO price* % chg in soy oil
price*
El Nino May 97 - Apr 98 Strong 23.1% 22.4%
La Nina Jul 98 - Mar 01 Strong -61.6% -46.2%
El Nino May 02 - Feb 03 Moderate 25.2% 31.2%
El Nino Jul 04 - Jan 05 Weak -5.6% -12.7%
La Nina Nov 05 - Mar06 Weak -0.9% -3.8%
El Nino Sep 06 - Jan 07 Weak 20.5% 15.8%
La Nina Aug 07 - Jun 08 Moderate 47.7% 69.1%
La Nina Dec 08 - Mar 09 Weak 18.9% -1.5%
El Nino Jul 09 - Apr 10 Moderate 29.9% 7.9%
La Nina Jul 10 - Apr 11 Strong 42.4% 44.9%
La Nina Sep 11 - Mar 12 Moderate 7.9% -1.7%
* Changes are calculated using prices at the end of ENSO cycle
and prices at the beginning of ENSO cycle SOURCES: CIMB, COMPANY
REPORTS
Similar impacts were also observed for both oil and coal prices,
though the positive impact on oil prices was generally less
(average price gains of only 6% yoy during the year of the El Nio
episode) than the impact seen on CPO and coal prices (average price
gains of 25% during year of the El Nio episode).
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Figure 26: Historical average yearly Brent oil price, US$/bbl
generally positive impact but at a smaller magnitude
Figure 27: Historical average yearly Newcastle coal price,
US$/tonne generally positive impact from El Nio
Title:
Source:
Please fill in the values above to have them entered in your
report
-
20
40
60
80
100
120
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Average Brent Oil price, US$/bbl
Title:
Source:
Please fill in the values above to have them entered in your
report
0
20
40
60
80
100
120
140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2013 2014
Newcastle coal price, US$/tonne
SOURCES: BLOOMBERG SOURCES: BLOOMBERG
2.4 The government is in better shape than 97/98
When Mother Nature strikes and bad harvest comes, it is up to
the big brother to save the day. Compared with the last severe case
in 1997/98, the current government is in a better shape to prop up
the market effectively when such time comes.
Firstly, the political environment is more stable. The Asian
Financial Crisis era which coincided with El Nio back in 1997/98
severely affected domestic stability, with dissatisfaction against
the government mounting and ultimately leading to the fall of the
New Order regime in July 1998. Since then, Indonesias democracy has
matured significantly, with more than four smooth general
elections. The government is elected directly by the people and
President Jokowi has a strong mandate though his popularity is
tested as he undertakes the tough reform of eliminating fuel
subsidy.
Figure 28: The opposition turned out to be friendlier than
initially expected...
Figure 29: however, declining approval rating is something more
pressing, as Jokowis support comes from the voters
Title:
Source:
Please fill in the values above to have them entered in your
report
PDI-P, 19.5%
Nasdem, 6.3%
PKB, 8.4%
Hanura, 2.9%
Gerindra, 13.0%
PKS, 7.1%
Golkar, 16.3%
PAN, 8.8%
PPP, 7.0%
Demokrat, 10.9%
0%
20%
40%
60%
80%
100%
PDIP-led coalition Gerindra-led coalition
PDI-P Nasdem PKB Hanura Gerindra PKS Golkar PAN PPP Demokrat
Title:
Source:
Please fill in the values above to have them entered in your
report
89.9%
65.2%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
3 Month 6 Month
SOURCES: GENERAL ELECTION COMMISSION SOURCES: KOMPAS
The government now has more financial means to support price
stability. The leverage on both the government and the private
sectors in 97/98 were much higher compared with the current level.
In fact, Indonesias external debt to
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GDP exceeded 100% during the Asian Financial crisis, vs. no more
than 35% presently.
Figure 30: Indonesias external debt better positioned this time
and still able to increase leverage if needed
Title:
Source:
Please fill in the values above to have them entered in your
report
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
LT debt - public sector LT debt - private sector
Short-term debt Interest on long-term debt
External debt to GDP (RHS)
US$ mn
SOURCES: BI, WB
Secondly, the food security and resilience is one of the
governments cornerstone projects. It budgeted Rp25tr this year to
support food security, including the building of new irrigation
systems, procurement of seeds and fertilisers, as well as building
technology parks and science parks. It also budgeted Rp9.2tr
(c.US$722m) in equity injection, to be injected into the SOEs, in
order to further advance food security.
Figure 31: Equity injections to SOEs to establish food security,
in Rp bn
Title:
Source:
Please fill in the values above to have them entered in your
report
PTPN III, Rp3,150
PTPN VII, Rp18
PTPN IX, Rp100
PTPN X, Rp98
PTPN XI, Rp65
PTPN XII, Rp70
PT Permodalan Nasional Madani, Rp1,000
PT Garam, Rp300
Perum Bulog, Rp3,000
PT Pertani, Rp470
PT Sang Hyang Seri, Rp400
PT Perikanan Nusantara, Rp200
Perum Perikanan Indonesia, Rp300
SOURCES: CIMB, COMPANY REPORTS
Indeed, one of the biggest receivers of equity injection is the
State Logistics Agency (Bulog), which has been tasked to stabilise
domestic food prices. The government earlier this year increased
the number of food categories that Bulog has to oversee into seven,
namely rice, corns, soybeans, sugar, onions, chili and beef. Extra
scrutiny seems to be put on this agency, as its president director
was recently removed after holding the position for merely six
months. This was preceded by the failure of Bulog to control rice
prices, which spiked earlier in the year. The agency underperformed
its target to absorb 4 million tons of rice produced by local
farmers this year, which led to its helplessness in the wake of the
rice price spike. Indeed, in the brink of an El Nio shock, the
agencys role in stabilising foods prices has become more important
than ever.
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July 10, 2015
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Thirdly, the president issued Decree No. 71 year 2015 recently.
This allows the government to cap prices of staple foods and other
basic goods during peak demand periods on/after religious holidays
or during periods of price volatility. One of the provisions within
the regulation prohibits hoarding of staple or important goods at
the warehouse during times of goods shortage, volatile prices and
supply disruptions. This provides the legal framework for the
government to arrest price speculators, against whom it was
helpless in the past.
3. VALUATION AND RECOMMENDATIONS
3.1 Market bearish mood
There is a lack of observable adverse impact from El Nio
episodes to JCI valuations. In fact, the three episodes of weak to
moderate El Nio episodes over the past decade or so did not seem to
adversely impact JCI valuations. Direct impact on earnings was also
relatively mild, except for the positive impact on the plantation
sector. Production shortfall was more than offset by higher
prices.
An El Nio event would plausibly affect earnings meaningfully and
hence valuations given the potential severity of the impact on
economic growth and inflation, if not handled carefully. The
1997/98 case could not be used as a comparison as the impact of the
Asian Financial Crisis was overwhelming given the debt burden and
defaults, massive exchange rate depreciation (by more than
threefold) and huge capital outflows. The 1982 episode could not be
used as the JCI was then at its infancy.
Figure 32: JCI historical monthly P/E - no observable adverse
impact to JCI valuations during El Nio episodes
Title:
Source:
Please fill in the values above to have them entered in your
report
-
50
100
150
200
250
300
350
400
0x
5x
10x
15x
20x
25x
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
JCI P/E JCI EPS (RHS)
El Nino period
SOURCES: CEIC, IDX, BLOOMBERG
Current JCI valuations seem to have priced in a bearish growth
scenario. It has fallen 8% YTD, dropping sharply in 2Q following
lower-than-expected GDP growth, with 14.4x forward P/E (1.8 s.d.
below 3-yr mean) and 2.4x forward P/BV (2.5 s.d. below 3-yr mean).
It is at valuations similar to the 2013 sell-off.
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Figure 33: JCIs 12-month forward P/E Figure 34: JCIs 12-month
forward P/BV
Title:
Source:
Please fill in the values above to have them entered in your
report
10x
11.5x
13x
14.5x
16x
17.5x
JCI Rolling forward P/E
3yr MA
Title:
Source:
Please fill in the values above to have them entered in your
report
2x
2.25x
2.5x
2.75x
3x
3.25x
3.5x
3.75x
4x
JCI Rolling forward P/BV
3yr MA
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG SOURCES: CIMB, COMPANY
REPORTS, BLOOMBERG
Using the IMF working paper sensitivity and adjusting for lower
primary sector contribution to GDP, a moderate El Nio could result
in GDP growth decreasing by 0.5% in FY15 and another 1.0% in FY16.
This could translate into earnings downside of 2.1% pts in FY15 and
3.9% in FY16, going by the historical multiplier between JCI
earnings growth and real GDP of 3x. In such a case, earnings growth
over FY15-16, currently expected at 7-16%, will be reduced to
4-14%. Such scenario would bump up the JCIs forward P/E to 15.0x,
about 1.1 s.d. below its 3-yr mean, which is about the level of the
bottom seen during 2013 sell-offs.
In the case of a strong El Nio, adjusted GDP growth downside
could be 1.3% in FY15 and 2.5% in FY16. This is severe. The
earnings risk could lead to cuts of 3.9% in FY15 and 7.5% in FY16,
or flat yoy growth in FY15 and 9% yoy in FY16. In that case, the
JCI forward P/E would rise to 16.0x, about 0.1 s.d. above 3-yr
mean.
Figure 35: The index valuations appear to have already priced in
a moderate El Nio scenario, but definitely not expecting a strong
El Nio scenario.
Title:
Source:
Please fill in the values above to have them entered in your
report
13
14
15
16
17
18
19
20
JCI forward P/E (base case)
moderate El Nino
base case
strongEl Nino
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG
On a P/E basis, the market appears to have priced in a moderate
case of El Nino, also judging from the relatively robust rallies
among CPO names. However, it has yet to price in a severe El Nino.
In that case, assuming P/E drops to 1 s.d. below 3-yr mean, JCI
downside is c.7% from the current level.
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3.2 Winner and losers
CPO players are the clear winners, given that its prices
historically correlate positively with El Nio events. Planters that
experience less production impact would reap double the benefit.
These could be those with more estates in less affected regions
such as north Sumatera or Kalimantan. AALI and LSIP provide the
best proxy for El Nino play. Along with CPO players, coal and
O&G companies could also benefit given the historical positive
impact on both commodities. ADRO and upstream O&G operator MEDC
could benefit.
Conversely, companies that have high commodities input costs,
i.e. consumer staples companies such as MYOR and UNVR could be at
risk as their production costs could increase sharply while the
weaker purchasing power might limit their ability to pass on the
cost spikes. Historically, a dry weather hurt INCOs earnings as the
lower hydro power plant output force it to resort to higher-cost
oil fuel.
Figure 36: AALIs core EPS and forward P/E Figure 37: AALIs share
price tracks CPO price closely, diverging lately due to incentive
given to downstream industry
Title:
Source:
Please fill in the values above to have them entered in your
report
0x
5x
10x
15x
20x
25x
30x
35x
40x
45x
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
AALI core EPS AALI forward P/E (RHS)
Title:
Source:
Please fill in the values above to have them entered in your
report
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
0
200
400
600
800
1,000
1,200
1,400
9/1
/1997
6/1
/1998
3/1
/1999
12/1
/1999
9/1
/2000
6/1
/2001
3/1
/2002
12/1
/2002
9/1
/2003
6/1
/2004
3/1
/2005
12/1
/2005
9/1
/2006
6/1
/2007
3/1
/2008
12/1
/2008
9/1
/2009
6/1
/2010
3/1
/2011
12/1
/2011
9/1
/2012
6/1
/2013
3/1
/2014
12/1
/2014
CPO price AALI share price
(US$/tonne) (Rp/share)
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG SOURCES: BLOOMBERG
Figure 38: LSIPs core EPS and forward P/E Figure 39: LSIPs share
price tracks CPO price closely
Title:
Source:
Please fill in the values above to have them entered in your
report
0x
5x
10x
15x
20x
25x
30x
-400
-300
-200
-100
0
100
200
300
400
500
LSIP core EPS LSIP forward P/E (RHS)
Title:
Source:
Please fill in the values above to have them entered in your
report
0
500
1,000
1,500
2,000
2,500
3,000
3,500
0
200
400
600
800
1,000
1,200
1,400
9/1
/1997
6/1
/1998
3/1
/1999
12/1
/1999
9/1
/2000
6/1
/2001
3/1
/2002
12/1
/2002
9/1
/2003
6/1
/2004
3/1
/2005
12/1
/2005
9/1
/2006
6/1
/2007
3/1
/2008
12/1
/2008
9/1
/2009
6/1
/2010
3/1
/2011
12/1
/2011
9/1
/2012
6/1
/2013
3/1
/2014
12/1
/2014
CPO price LSIP share price
(US$/tonne) (Rp/share)
SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG SOURCES: BLOOMBERG
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Strategy Indonesia
July 10, 2015
20
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-
Strategy Indonesia
July 10, 2015
21
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-
Strategy Indonesia
July 10, 2015
22
of the date hereof and are subject to change. If the Financial
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AAV, ADVANC, AIT, AMATA, ANAN, AOT, AP, ASP, BANPU, BAY, BBL,
BCH, BCP, BEC, BECL, BGH, BH, BIGC, BJC, BJCHI, BLAND, BMCL, BTS,
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from the perspective of a third party. It is not an evaluation of
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result may be changed after that date. CIMBS does not confirm nor
certify the accuracy of such survey result.
Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey
Result
Description: Excellent Very Good Good N/A
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-
Strategy Indonesia
July 10, 2015
23
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Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB
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Institutional Investors whose ordinary business activities involve
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Major Institutional Investor must not rely on this communication.
The delivery of this research report to any person in the United
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for distribution to professional, institutional or sophisticated
investors as defined in the laws and regulations of such
jurisdictions.
Rating Distribution (%) Investment Banking clients (%)
Add 56.5% 6.7%
Hold 30.7% 4.5%
Reduce 12.6% 1.7%
Distribution of stock ratings and investment banking clients for
quarter ended on 30 June 2015
1508 companies under coverage for quarter ended on 30 June
2015
Corporate Governance Report of Thai Listed Companies (CGR). CG
Rating by the Thai Institute of Directors Association (Thai IOD) in
2014. AAV Very Good, ADVANC Very Good, AEONTS not available, AMATA
- Good, ANAN Very Good, AOT Very Good, AP - Good, ASK Very Good,
ASP Very Good, BANPU Very Good , BAY Very Good , BBL Very Good, BCH
not available, BCP - Excellent, BEAUTY Good, BEC - Good, BECL Very
Good, BGH - not available, BH - Good, BIGC - Very Good, BJC Good,
BLA Very Good, BMCL - Very Good, BTS - Excellent, CCET Good, CENTEL
Very Good, CHG not available, CK Very Good, CPALL not available,
CPF Very Good, CPN - Excellent, DELTA - Very Good, DEMCO Good, DTAC
Very Good, EA - Good, ECL not available, EGCO - Excellent, GFPT -
Very Good, GLOBAL - Good, GLOW - Good, GRAMMY - Excellent, HANA -
Excellent, HEMRAJ Very Good, HMPRO - Very Good, ICHI - not
available, INTUCH - Excellent, ITD Good, IVL - Excellent, JAS not
available, JUBILE not available, KAMART not available, KBANK -
Excellent, KCE - Very Good, KGI Good, KKP Excellent, KTB -
Excellent, KTC Good, LH - Very Good, LPN Very Good, M - not
available, MAJOR - Good, MAKRO Good, MBKET Good, MC Very Good, MCOT
Very Good, MEGA Good, MINT - Excellent, OFM Very Good, OISHI Good,
PS Very Good, PSL - Excellent, PTT - Excellent, PTTEP - Excellent,
PTTGC - Excellent, QH Very Good, RATCH Very Good, ROBINS Very Good,
RS Very Good, SAMART - Excellent, SAPPE - not available, SAT
Excellent, SAWAD not available, SC Excellent, SCB - Excellent,
SCBLIF Good, SCC Very Good, SCCC - Good, SIM - Excellent, SIRI -
Good, SPALI - Excellent, STA Very Good, STEC - Good, SVI Very Good,
TASCO Good, TCAP Very Good, THAI Very Good, THANI Very Good, THCOM
Very Good, THRE not available, THREL Good, TICON Good, TISCO -
Excellent, TK Very Good, TMB - Excellent, TOP - Excellent, TRUE
Very Good, TTW Very Good, TUF - Good, VGI Very Good, WORK not
available.
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Strategy Indonesia
July 10, 2015
24
CIMB Recommendation Framework
Stock Ratings Definition:
Add The stocks total return is expected to exceed 10% over the
next 12 months.
Hold The stocks total return is expected to be between 0% and
positive 10% over the next 12 months.
Reduce The stocks total return is expected to fall below 0% or
more over the next 12 months.
The total expected return of a stock is defined as the sum of
the: (i) percentage difference between the target price and the
current price and (ii) the forward net dividend yields of the
stock. Stock price targets have an investment horizon of 12
months.
Sector Ratings Definition:
Overweight An Overweight rating means stocks in the sector have,
on a market cap-weighted basis, a positive absolute
recommendation.
Neutral A Neutral rating means stocks in the sector have, on a
market cap-weighted basis, a neutral absolute recommendation.
Underweight An Underweight rating means stocks in the sector
have, on a market cap-weighted basis, a negative absolute
recommendation.
Country Ratings Definition:
Overweight An Overweight rating means investors should be
positioned with an above-market weight in this country relative to
benchmark.
Neutral A Neutral rating means investors should be positioned
with a neutral weight in this country relative to benchmark.
Underweight An Underweight rating means investors should be
positioned with a below-market weight in this country relative to
benchmark.
*Prior to December 2013 CIMB recommendation framework for stocks
listed on the Singapore Stock Exchange, Bursa Malaysia, Stock
Exchange of Thailand, Jakarta Stock Exchange, Australian Securities
Exchange, Taiwan Stock Exchange and National Stock Exchange of
India/Bombay Stock Exchange were based on a stocks total return
relative to the relevant benchmarks total return. Outperform:
expected to exceed by 5% or more over the next 12 months. Neutral:
expected to be within +/-5% over the next 12 months. Underperform:
expected to be below by 5% or more over the next 12 months. Trading
Buy: expected to exceed by 3% or more over the next 3 months.
Trading Sell: expected to be below by 3% or more over the next 3
months. For stocks listed on Korea Exchange, Hong Kong Stock
Exchange and China listings on the Singapore Stock Exchange.
Outperform: Expected positive total returns of 10% or more over the
next 12 months. Neutral: Expected total returns of between -10% and
+10% over the next 12 months. Underperform: Expected negative total
returns of 10% or more over the next 12 months. Trading Buy:
Expected positive total returns of 10% or more over the next 3
months. Trading Sell: Expected negative total returns of 10% or
more over the next 3 months.
Page 1Highlighted CompaniesOverviewGraphics Title: Figure 1: El
Nio hit the primary sector more than the secondary or tertiary
sectorsEl Nio comethEconomic impactMarket impact
Page 2KEY CHARTSEl Nio comesMore resilient to growth
riskInflation pains more manageableMarket impactGraphics Title:
Performance AnalysisGraphics Title: Real GDP contributor by
industryGraphics Title: yoy inflation
Page 3Table Title: Figure 2: Thematic picks
Page 4Beating the heat1. BACKGROUND1.1 The El Nio
phenomenaGraphics Title: Figure 3: Southern Oscillations the normal
patternGraphics Title: Figure 4: El Nio condition
Page 5Graphics Title: Figure 5: Global climatological effects of
El Nio1.1 The El Nio phenomena (CONT)
Page 6Graphics Title: Figure 6: Southern Oscillation Index now
entering El Nio episode1.1 The El Nio phenomena (CONT)Graphics
Title: Figure 7: Areas potentially affected by El Nio1.2 Prolonged
drought hit harvest
Page 71.2 Prolonged drought hit harvest (CONT)Table Title:
Figure 8: Rainfall drop in 1982 and 1997 compared with average
rain