Sinarmas Market Outlook 2020 - Stable Bull Year.pdf

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1

Stable Bull Year Recovery Hopes in Favor of EMs

FY20F JCI target: 6,750 (7.1% upside)

We set our JCI target for 2020F at 6,750, derived from 8.6% FY20F EPS growth

and 16.2x FY20F PE (5-yr mean). Our JCI target implies 7.1% upside potential

from our FY19E target of 6,300. While we expect FY20F to be an extension of

FY19E’s ~5.0% economic growth, positive catalysts for equity should come from

1) lower tail risks as economic indicators are bottoming, 2) better earnings

visibility following FY19E’s sluggish performance, 3) greater political clarity post

election year, and 4) weaker USD which signals a risk-on play as flight-to-quality

premium fades. Upside risks to our call include potential relaxation on fiscal deficit

cap and FDI boost from Omnibus Law, whereas downside risks to our call may

come from rising China’s bond defaults and weaker-than-expected domestic

household consumption. Be that as it may, heightened geopolitical risks and

recession fears appear to be overblown in our view with U.S.-China reaching

‘phase one’ trade deal and many indicators are pointing to economic bottoming.

Macro economic indicators

Stable economic growth

As of 9M19, economic growth stood at a YoY reading of 5.02%, broadly inline with

market and our estimate of 5.0%, but lower than 2Q19 reading of 5.05%. Weaker

government spending post 2019 election (up 98 bps YoY) paired with softer export

(up 2 bps YoY) contributed to the slower growth. Private consumption, however,

posted a stable growth of 5.01% YoY, supporting the economic expansion during

the quarter. As for FY20F, we expect economic growth to be at 5.0%-5.1% target

range with equal weighted upside-versus-downside risks from our target. Breaking

down into components, growth in private consumption is expected to be slightly

lower at 5.0% level. Despite monetary and macroprudential policies easing this

year, price adjustment on several basic needs (e.g. cigarettes, electricity, and

BPJS premium) may pressurize consumption appetite in FY20F. Moreover, shifting

government’s focus on social assistance spending from direct transfer to more of

human capital development may challenge the translation to consumption

spending. As for investment, we believe that growth should be better due to

greater political clarity post election year and relatively low base this year.

Undeterred by sluggish commodity prices (except nickel), opportunity for FDI may

come from capital inflow stemmed by expansionary monetary and fiscal policy

from DMs, as well as government’s effort to boost investment, one of which

through Omnibus Law. As for government expenditure, improvement may occur in

2H20 given the high base in 1H19 (social assistance spending). Lastly, we expect

contribution from export-import should remain similar to FY19E as we see

continuation of import restriction in FY20F in order to safeguard country’s CAD.

Sinarmas Sekuritas | Market Outlook 2020

2019E 2020F

GDP Growth 5.0% - 5.1% 5.0% - 5.1%

Inflation 3.0% - 3.5% 3.0% - 3.5%

7 Day RR Rate 5.00% 4.25% - 5.00%

FX USDIDR 14,000 14,000 - 14,300

JCI Index 6,300 6,750

PE Ratio 16.4x 16.2x

2

Lower tail risks

Many global economic indicators that we monitor (global manufacturing PMI,

China credit impulse, Japan machine tool orders, and global semiconductor sales)

have shown apparent recovery in 2H19 following the downturn in 1H19. For the

most parts, we view these improvements are the products of central banks

easing, expansive fiscal policies, and improving trade war development. While the

bears are still cautious toward the yield curve, upticks in most of these indicators

signal a continuation of cyclical recovery for global trades and industrial activities

in the near-to-medium term. Taking all into account, we do not expect the global

economy to turn 180 degrees, nevertheless, the possibility of a sharp downturn in

FY20F should be minimal in our view. As such, reduced tail risks will bring positive

catalysts for stock prices which we believe favor EM equities relative to DMs.


GDP contribution as of 9M19

Source: BPS, Sinarmas Investment Research

GDP component %YoY growth

Source: BPS, Sinarmas Investment Research

Global PMI started to rebound in Aug-19

Source: Bloomberg, Sinarmas Investment Research

China credit impulse vs US ISM


Japan machine tool orders vs MSCI World EPS


Semiconductor sales vs MSCI World EPS


45.0

46.0

47.0

48.0

49.0

50.0

51.0

52.0

53.0

54.0

55.0

2012 2013 2014 2015 2016 2017 2018 2019

Global PMI

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

-150

-100

-50

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Japan Machine Tool Orders YoY - LHS MSCI World Index Trailing 12M EPS YoY Change - RHS

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

-60.00%

-40.00%

-20.00%

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20.00%

40.00%

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80.00%

1997

1998

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2019

Global Semiconductor Sales - LHS MSCI World Index Trailing 12M EPS - RHS

-10%

-5%

0%

5%

10%

15%

20%

HH Consumption Govt Spending Investment Export Import

56.6%

1.5%

9.6%

32.3%

-0.1%

HH Consumption Inventory Changes Govt Spending Investment Net Export (Import)

49

50

51

52

53

54

55

21

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2012 2013 2014 2015 2016 2017 2018 2019

China Credit Impulse - LHS Global PMI

3

Better earnings visibility

We see better earnings visibility in FY20F with JCI EPS rising 8.6% YoY versus a

lackluster growth of 2.7% YoY in FY19E. We turn more constructive on earnings

quality as we see positive turnaround in numerous sectors. Firstly, better earnings

quality should come from Banking sector (which contributes a large proportion of

index EPS) following this year’s mid-single digit growth and spurred by better

liquidity condition from easing policies as well as escalating government capex

spending post election year. Meanwhile, the IFRS 9 adoption should bring FY20F

EPS higher due to potentially lower credit cost. Similarly, we also see a number of

sectors which will experience a turnaround in earnings such as Automotive (Astra

International), Cement, Consumer Staples, Nickel, Oil & Gas, Plantation, and Pulp

& Paper. We regard the underperformance in FY19 has led to JCI’s sluggish

performance versus regional indices. As earnings recover, we expect some of the

capital outflow to return.

Sector EPS projection under our coverage


US 2Y/10Y continued to rise since Aug-19

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

2016 2017 2018 2019

JAPAN 10Y YIELD

Japan 10Y yield breached 0% first time since Mar-19

Sector FY19E EPS Growth FY20F EPS Growth

Automotive -2.6% 9.6%

Banking 6.2% 15.7%

Cement -9.2% 37.2%

Coal Mining 4.7% -9.2%

Construction -20.9% -4.1%

Consumer Staples -2.1% 4.9%

Industrial Estate 44.0% 11.6%

Media 14.1% 3.5%

Nickel -20.6% 67.4%

Oil and Gas -28.6% 27.1%

Plantation* -79.4% 365.0%

Property 10.5% -24.1%

Pulp and Paper -37.0% 21.3%

Retail 2.9% 12.4%

Telecommunication 64.7% 14.5%

Tobacco 12.4% -14.9%

JCI 2.7% 8.6%

*Figures on the table exclude SIMP due to negative PAT

Source: Bloomberg, Sinarmas Investment Research Source: Bloomberg, Sinarmas Investment Research

-50

0

50

100

150

200

2014 2015 2016 2017 2018

US 2Y/10Y spread

4

Greater certainty post 2019 election

Being a political year, 2019 was colored with uncertainties. Thereupon, this

resulted in lower investment and business confidence across the board. Despite

rising inquiries for industrial lands leading to and following 2019 presidential

election, business activities and consumption spending were postponed as many

decided to take wait-and-see stance. As political overhang clears, pent-up demand

from both foreign and local investors now has a better chance to materialize. This,

we expect, may be further strengthened by Omnibus Law, which we will discuss

below.

Risk-on sentiment from weaker USD

There are few factors that may contribute to weaker USD in FY20F. First, as Fed’s

‘QE’ continues, the value of U.S. Dollar is expected to weaken due to rising

liquidity. While Chairman Powell has denied Fed’s balance sheet expansion for

reserve management purposes as a form of QE, the treasury purchases will add

the Dollar supply and increase liquidity. Second, lower volatility reading (VIX) on

the back of improving global backdrop from trade front and PMIs are expected to

further pressurize U.S. Dollar’s value as a safe-haven as well. Lastly, subdued

inflation in the U.S. has diminished Fed’s ability to raise rates in the near future.

This keeps a cap on Dollar’s strength. All of these factors pointing to weaker USD

should improve the risk-on sentiment on EMs as currency exchange risks have

always overshadowed EM equities.


6.9%

2.7%

8.6%8.8%

9.4%

FY18 FY19E FY20F FY21F FY22F

JCI EPS growth (%YoY)

Consolidated coverage EPS growth

Fed’s balance sheet


3.5

3.7

3.9

4.1

4.3

4.5

4.7

2015 2016 2017 2018 2019

Fed Balance Sheet (in USD Mn)

0

5

10

15

20

25

30

35

2015 2016 2017 2018 2019

VIX

Cboe volatility index (VIX) is near all time low


Source: Sinarmas Investment Research

5

Rupiah to remain stable in FY20F

To date, Rupiah has appreciated against USD by 3 ppt, outperforming a handful

majority in EM currencies basket and despite 100 bps rate cuts in 2H19 (vs 75 bps

FFR cuts). In addition to the massive foreign inflow of IDR 171.9tn to the bond

market (SBN), Bank Indonesia continued to be supportive toward Rupiah

exchange rates via bond and FX markets in order to maintain economic stability.

Onwards, we expect USDIDR to be within 14,000-14,300 range. While we see

rooms for more policy easing (50-75 bps), weaker USD outlook should provide

cushion to Rupiah in FY20F. Downside risk to our call is worse-than-expected

global turmoil fueled by rising China’s bond defaults.


FOMC dot plots

Source: Bloomberg

USDIDR real spread vs IDR (%YoY, Inverted)

Source: Bloomberg, OJK, Sinarmas Investment Research

EM currencies performance vs USD

Source: Bloomberg

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%-1.00

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2012 2013 2014 2015 2016 2017 2018 2019

Real Spread IDR (% YoY) [RHS]

7DRRR vs CPI

Source: Bank Indonesia, Sinarmas Investment Research

3.25 3.183.4 3.41

3.23 3.12 3.18 3.2

2.883.16 3.23 3.13

2.822.57 2.48

2.83

3.32 3.28 3.323.49 3.39

3.133.00

4.25 4.25 4.25 4.25

4.75

5.25 5.255.50

5.75 5.756.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

5.755.50

5.255.00 5.00

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Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19

Inflation (%YoY) 7DRRR

6

Upside risk from Omnibus Law

As we have mentioned briefly in the paragraph above, the introduction of Omnibus

Law can be a key catalyst for investment and business confidence. One of the

structural issues in Indonesian economy has been the lack of FDI. Aside from the

lengthy paperwork and numerous permits/regulations required, the complexity of

layers in Indonesian bureaucracy has become a major pushback. The proposed

Omnibus Law will simplify a wide range of areas (labor laws, investment

requirements, land acquisition rules, and many others) and act as a replacement

to the current existing and overlapping laws. Moreover, MoF is also pushing for a

lower corporate tax and the removal of dividend tax to be included in the Omnibus

Bill in order to further improve the country’s attractiveness. This, however, will be

done in stages to safeguard the fiscal impacts. As for corporate tax, tax rate will

be reduced gradually from current 25% to 22% in FY21/22, and to 20% in FY23.

Furthermore, companies that go public in FY21-23 will get to enjoy an additional

benefit of 3 ppt income tax (PPh) reduction from 22% in FY21/22 and 20% in

FY23 to 19%/17% respectively. While timeline and details are still under

discussion, passing rate for the bill is expected to be high as, in terms of political

support, political parties from President Widodo’s coalition control more than 70%

of the parliament. Meanwhile, the execution of the bill will provide upside risks to

the JCI.

Downside risk from China’s bond defaults

While we are guiding for a brighter global economic picture, downside risk to our

call may come from China’s bond market. Following a record default in China’s

domestic bonds this year, there are USD 8.6bn offshore bonds that will be due

next year. Admittedly, these bonds have at least 15% yields as they are classified

as stressed. Accounted for almost 40% of the total outstanding corporate dollar

bonds, with policymakers continue limiting leverage, these bonds may stem risks

to EMs from many perspectives; tighter liquidity, FX volatility, and shift from

equities to save-haven assets.

U.S.-China: Prisoner’s Dilemma

Using the prisoner’s dilemma analogy in game theory, the U.S.-China trade talk

may have appeared to have thin chances of success at the beginning. Aside from

being the two largest economies in the world, the two countries have eloquent

ways of expressing differences. On one hand, U.S. taunted China with trade tariffs

on a wide range of Chinese products. On the contrary, China intimidated U.S. with

their ‘self-destructive nuclear option’ by selling U.S. treasuries. After months of

negotiation, however, the two countries finally managed to reach the ‘phase one’

trade deal just before the year ended. Though the tangible impact from this is not

enough to exempt both countries from heading into an economic slowdown, it

shows that neither country wants to continue a standoff due to respective

personal interests from both presidents: 2020 U.S. presidential election (Trump)

and political stability (Xi). To note, the state of the economy, normally portrayed

in the capital market performance, is a crucial determinant to the incumbent’s

electability to win the election votes. With the next U.S. presidential election is

approaching, this trade negotiation is very important for Trump’s political career.

Hence, it is Trump’s best interest to close this deal and use it for his 2020 re-

election campaign. On the flip side, while it is too early to assume what the final

outcome may be, ‘phase one’ trade deal has eliminated the worst possible

outcome for both countries.


7

What to buy?

In all, we believe FY20F to be a year of stability as many indicators are signaling a

continuation of cyclical recovery for global trades and industrial activities. As such,

reduced tail risks should bring positive catalysts for stock prices primarily for EMs.

In addition, better earnings visibility and weaker USD are also the key factors to

our positive stance toward JCI. Lastly, from the domestic perspective, we see a

brighter macroeconomic picture for Indonesia given the less uncertainty in political

overhang as well as the proposed Omnibus Law, which will be a tailwind to JCI’s

performance in FY20F. With that being said, our top picks for this year are: BMRI

(BUY, FY20 TP: 8,650), BBNI (BUY, FY20 TP: 9,150), SMGR (BUY, FY20

TP: 15,400), WIKA (BUY, FY20 TP: 2,510), BSDE (BUY, FY20 TP: 1,500),

SMRA (BUY, FY20 TP: 1,300), MAPI (BUY, FY20 TP: 1,300), and TLKM

(BUY, FY20 TP: 4,950). From the commodity sector, we like LSIP (BUY, FY20

TP: 1,720) as we see recent rally in CPO price to sustain in FY20F. As for small-to

-mid cap, we continue to like WEGE (BUY, FY20 TP: 480) due to its

undemanding valuation, favorable sector outlook, and expansion in modular

segment. Still from small-to-mid cap, we also like DMAS (BUY, FY20 TP: 360)

as it captures the improving investment outlook in Indonesia. Lastly, we also see

defensive name such as INDF (BUY, FY20 TP: 9,200) is attractive supported by

its commodity-related business and cheap valuation.


S&P 500 performance during previous presidential terms


0

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3500

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 2015 2016 2017 2018 2019

George H. W. Bush

Start, Total Index

Return 51%

Bill Clinton Start,

Total Index Return

210%

George W. Bush Start,

Total Index Return -

40%

Barack Obama Start,

Total Index Return

182%

Donald Trump Start,

Total Index Return 38%

8

Our view on commodities:

CPO: the arrival of long-awaited positive breeze

Although it might be a bit delayed, however CPO prices have started a rally since

end of 1H19 and currently still stands strong at MYR 2,850/ton on several reasons

such as supportive MPOB data, drop in CPO output, better demand from China

and India along with positive effect on phase one trade deal between US-China.

We expect the output drop in 2019 is only the beginning and will extend to 2020

onwards, on limited new plantings from the previous years plus more aggressive

replanting program undertaken by big CPO players. Meanwhile in the near-term,

production will also under pressure due to the cutback in fertilizer application and

recent drought and haze that may pose knock-on effect on production yield in

2020. Coupled with the expected strong incremental demand backed by the B30

implementation in Indonesia starting early 2020, we reiterate our bullish stance

on the industry and expect CPO price to trade at average of MYR 2,500 per ton in

FY20F.

Pulp and Paper: pulp price conundrum

2019 is a sloppy year for pulp and paper industry following pulp price slump since

end of FY18 and remains low at current moment. The bearish pulp price outlook

mainly came from weakening pulp demand that resulted in high inventories both

in China and European ports (two biggest users for pulp). We believe further

observation on pulp demand along with the inventory level is important to see

where price will be going on from current level. Overall, we expect pulp price to

recover in 2020, although only at moderate magnitude and will occur by fastest in

2H20. We are now seeing benchmark pulp price at USD 650/ton in FY20F.


Inventory almost fall to its 5-years average level


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Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19

MPOB Production MPOB Export MPOB Inventory 5Y Avg Inventory

9

Coal: weakness persists as demand fades

Global economy slowdown, fueled from US-China trade war, has impacted energy

demand, especially for China and India (two biggest consumers for coal). As a

result, coal price has moved in a continuous negative direction during 2019,

closing in at USD 67.9 per ton (Newcastle 6,322) as of Nov-19, or down by

33.5% compared to a year ago. Going forward to FY20, we believe that global coal

price could keep dimming as we see demand to remain weak while supplies grow.

Global economy slowdown will continue to weigh down on thermal demand,

particularly from China and India. On the other hand, current high inventories

level and additional local supplies from China’s new and more efficient mine this

year will likely drive up supplies, lowering their need of imports. Hence, we expect

global coal price to remain weak in FY20, averaging at USD 70 per ton, down by

10% from FY19 avg but up by 4% from 4Q19. Indonesia’s low coal price,

however, should be more resilient as we see improvement in demand/supply

balance driven by decelerating production growth and new power plant roll out.

Nickel: improving balance

After recent outperformance in 3Q19 boosted by the changes in Indonesia ore

export ban regulation, nickel stocks dived in recent months as nickel price pulled

back to USD 13,000 per ton from its highest level at USD 18,050 in Sep-19.

Recent nickel fallout was driven by weakness in the stainless steel and EV sales

department, as well as ramp-up ore export coming from Indonesia prior to the

ban deadline (Jan-20). Despite recent weakness, we forecast nickel price to

rebound in FY20 as we see the current inventory remains low while demand will

still grow modestly paired with a moderate supply growth as higher refined output

will be strained by lower ore availability from Indonesia’s ore export ban. Wood

Mackenzie forecasts demand to grow by 3.8% YoY in FY20, slowing down from

6.3% in FY19. Stainless steel and EV batteries remain to be the engine drivers for

nickel consumption growth. On the other hand, refined nickel output is forecasted

to grow by 5.3% in FY20, declining from 8.3% in FY19. Nickel mined production,

however, is expected to drop by 3% YoY. These should level out the demand/

supply balance in FY20, after posting a supply deficit in the past 4 years. We

forecast nickel price to average at USD 15,000 per ton in FY20, rising from USD

14,000 per ton average in FY19.


China rising coal production and inventory


3000

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Inventory at 6 Major Power Plant (Mt) 12-month Production (Mt)

10

Oil: calm waters ahead

Oil price has moved in steadily in 2019, settling in at USD 59 per barrel as of Dec-

19 (+30% YTD), as OPEC and its allies have been supportive in maintaining

market balance in response to the rising of US shale oil output and lackluster

demand. Since OPEC’s decision to cut production at the end of FY18, we have

seen a major decline in their output, down to 29.7 mn bpd in Oct-19 from 33.0

mn bpd in Nov-18. Post strong recovery in 2019, we expect oil price to stabilize at

the current level as wee see market balance to remain unchanged this year. On

the supply side, we see output growth from US will slow down to 0.9 mn bpd in

FY20, after strong output growth in FY19 (1.3 mn bpd). Meanwhile, recent OPEC

decision to further cut their production by another 500k barrels per day will help

to stabilize market balance from a lackluster demand in FY20. Weak demand,

fueled by US China trade war and fears of global economic recessions will play a

major role in setting the oil price this year. EIA estimates that demand will rise by

1.2 mn bpd in FY20, rising slightly from an increase of 1.0 mn bpd in FY19. We

forecast oil price to average at USD 60 per barrel in FY20, compared to USD 57

per barrel in FY19.


Major OPEC oil producers

Source: Bloomberg, EIA, OPEC, Sinarmas Investment Research

US shale oil output and breakeven point

0.0

4.0

8.0

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16.0

20.0

Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19

Saudi Arabia Iraq Iran Venezuela


9.0

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US Shale oil production (in mn bpd) US Shale breakeven point (in USD/barrel) Oil price (in USD/barrel)

11

Sinarmas Sekuritas | Rating Summary

2019E 2020F 2019E 2020F 2019E 2020F IDR Bn USD Mn

Automotive

1 ASII ADD 6,850 7,800 13.9% -1.1 10.4 14.7 13.4 2.1 1.9 277,312.3 19,776.9

Banking

2 BMRI BUY 7,375 8,650 17.3% 14.1 15.8 13.7 11.8 2.0 2.0 344,166.7 24,544.8

3 BBRI NEUTRAL 4,280 4,540 6.1% 5.3 8.7 16.4 15.1 2.8 2.6 527,920.1 37,649.4

4 BBCA ADD 31,800 35,675 12.2% 10.1 16.9 30.9 26.4 5.1 4.6 784,029.3 55,914.2

5 BBNI BUY 7,650 9,150 19.6% 0.7 20.1 11.2 9.4 1.4 1.4 142,662.2 10,174.2

6 BBTN NEUTRAL 2,170 2,300 6.0% -58.4 126.7 20.8 10.8 1.0 1.3 22,980.3 1,638.9

Cement

7 INTP NEUTRAL 20,000 20,200 1.0% 44.0 8.3 44.6 41.2 3.1 3.1 73,624.6 5,250.7

8 SMGR BUY 12,300 15,400 25.2% -28.9 58.2 41.6 26.3 2.6 2.5 72,957.7 5,203.1

Coal Mining

9 ITMG NEUTRAL 11,050 12,000 8.6% -48.5 -15.7 7.1 8.5 1.0 1.1 12,485.7 890.4

10 ADRO NEUTRAL 1,590 1,650 3.8% 17.8 -14.9 7.5 8.8 0.8 0.8 50,857.7 3,627.0

11 PTBA NEUTRAL 2,580 2,700 4.7% -19.5 -4.4 7.7 8.0 1.5 1.4 29,723.3 2,119.8

12 INDY BUY 1,160 1,400 20.7% -51.8 -14.8 6.4 7.4 0.4 0.4 6,043.8 431.0

13 UNTR BUY 21,175 25,700 21.4% -1.0 3.8 8.8 8.4 1.6 1.4 78,985.6 5,633.0

Construction

14 WIKA BUY 2,050 2,510 22.4% 19.3 5.1 10.9 10.4 1.4 1.4 18,388.4 1,311.4

15 PTPP BUY 1,650 1,900 15.2% -29.4 9.3 11.1 10.2 0.9 1.1 10,229.8 729.6

16 ADHI BUY 1,225 1,550 26.5% 1.0 6.1 8.5 8.0 0.8 0.9 4,362.0 311.1

17 WSKT NEUTRAL 1,445 1,570 8.7% -47.5 -48.5 10.2 19.9 1.1 1.1 19,614.4 1,398.8

18 WTON BUY 440 570 29.5% 7.0 9.1 9.6 8.8 1.4 1.3 3,834.8 273.5

19 WSBP NEUTRAL 324 350 8.0% -26.1 13.8 11.1 9.8 1.1 1.0 8,541.0 609.1

20 WEGE BUY 296 480 62.2% 3.8 14.2 10.0 8.8 1.9 1.8 2,833.3 202.1

Consumer Staples

21 UNVR NEUTRAL 41,225 43,900 6.5% -20.6 1.0 46.3 45.8 47.9 47.1 314,546.8 22,432.4

22 ICBP ADD 11,450 12,800 11.8% 10.2 5.3 29.6 28.1 5.9 5.3 133,528.8 9,522.8

23 KLBF NEUTRAL 1,600 1,680 5.0% 5.6 5.4 30.3 28.8 4.7 4.4 75,000.2 5,348.8

24 INDF BUY 7,750 9,200 18.7% 14.1 7.4 17.0 15.8 1.5 1.4 68,048.3 4,853.0

25 MYOR NEUTRAL 2,020 2,160 6.9% -2.3 7.9 28.8 26.7 5.0 4.5 45,164.6 3,221.0

26 SIDO ADD 1,275 1,400 9.8% 19.8 6.2 26.2 24.7 6.6 6.2 19,125.0 1,363.9

27 ROTI BUY 1,305 1,540 18.0% 61.0 20.5 34.3 30.2 2.6 2.8 8,073.4 575.8

28 UCID** BUY 1,500 1,900 26.7% 65.6 47.6 26.4 17.8 1.4 1.3 6,234.9 444.7

Industrial Estate

29 DMAS BUY 302 360 19.2% 84.0 12.9 19.0 16.8 2.4 2.4 14,555.8 1,038.1

30 BEST ADD 212 240 13.2% 12.9 25.8 6.3 8.5 0.5 0.5 2,045.2 145.9

31 SSIA NEUTRAL 700 700 0.0% 156.5 141.5 34.1 14.1 0.8 0.8 3,293.7 234.9

Media

32 SCMA ADD 1,445 1,650 14.2% -2.9 4.5 16.7 16.0 4.8 4.4 21,340.9 1,522.0

33 MNCN NEUTRAL 1,590 1,650 3.8% 30.5 2.8 11.8 11.5 1.9 1.7 22,699.0 1,618.8

No Ticker Rating Current Price* Target Price % ChgEPS Growth (%) PER (x) PBV (x) Market Capitalization

12

Sinarmas Sekuritas | Rating Summary

2019E 2020F 2019E 2020F 2019E 2020F IDR Bn USD Mn

Metal

34 INCO NEUTRAL 3,490 3,700 6.0% -34.2 135.1 67.1 28.5 1.4 1.3 34,677.8 2,473.1

35 ANTM ADD 850 970 14.1% -10.7 21.2 29.8 24.6 1.2 1.2 20,426.2 1,456.7

Oil and Gas

36 ELSA BUY 304 400 31.6% 17.0 9.1 9.0 8.3 0.8 0.8 2,218.7 158.2

37 PGAS ADD 2,130 2,350 10.3% -31.6 29.7 19.2 14.8 1.2 1.1 51,634.4 3,682.4

Plantation

38 AALI NEUTRAL 13,425 14,600 8.8% -82.9 417.8 114.4 22.1 1..4 1.4 25,838.9 1,842.7

39 LSIP BUY 1,420 1,720 21.1% -64.0 256.4 98.2 27.6 1.4 1.3 9,688.5 690.9

40 SIMP BUY 390 450 15.4% N/A N/A N/A 21.7 0.4 0.4 6,168.4 439.9

Property

41 BSDE BUY 1,255 1,500 19.5% 115.7 -43.9 10.3 18.4 0.9 0.8 24,154.6 1,722.6

42 SMRA BUY 1,030 1,300 26.2% 6.9 14.1 39.4 34.3 1.9 1.8 14,859.6 1,059.7

43 ASRI ADD 242 280 15.7% -63.3 15.3 15.4 13.4 0.6 0.5 4,755.2 339.1

44 PWON ADD 570 640 12.3% 5.7 -18.1 11.5 14.0 1.8 1.7 27,451.0 1,957.7

45 CTRA ADD 1,060 1,170 10.4% -24.9 -13.3 24.4 28.1 1.2 1.2 19,673.9 1,403.1

Pulp and Paper

46 INKP BUY 7,875 10,400 32.1% -45.1 17.9 12.4 10.5 1.0 0.9 43,084.0 3,072.6

47 TKIM NEUTRAL 11,300 12,350 9.3% -17.8 26.7 13.3 10.5 1.9 1.6 35,179.4 2,508.9

Retail

48 ACES NEUTRAL 1,550 1,730 11.6% 7.9 7.9 28.5 26.4 6.3 5.5 26,582.5 1,895.8

49 ERAA ADD 1,625 1,870 15.1% -68.8 89.1 22.5 11.9 1.2 1.1 5,183.8 369.7

50 LPPF NEUTRAL 3,700 4,030 8.9% 27.6 -0.4 8.4 8.4 4.9 4.3 10,378.1 740.1

51 MAPI BUY 1,030 1,300 26.2% 21.7 20.0 24.1 20.1 2.9 2.6 17,098.0 1,219.4

52 RALS NEUTRAL 1,035 1,140 10.1% 8.3 2.2 12.7 12.4 2.1 2.1 7,344.4 523.8

Telecommunication

53 TLKM BUY 3,990 4,950 24.1% 12.7 15.2 24.1 20.9 4.8 4.5 395,258.2 28,188.4

54 EXCL ADD 3,240 3,650 12.7% 3.3 4.5 45.6 31.4 2.0 1.9 34,629.0 2,469.6

55 ISAT ADD 3,120 3,600 15.4% N/A N/A N/A N/A 0.9 1.0 16,953.9 1,209.1

Tobacco

56 HMSP BUY 2,060 2,500 21.4% 6.2 -11.7 20.2 22.9 8.1 8.4 239,615.2 17,088.5

57 GGRM BUY 52,025 60,250 15.8% 23.2 -19.7 12.1 15.0 2.2 2.1 100,100.7 7,138.8

Miscellaneous

58 AKRA NEUTRAL 3,840 3,900 1.6% -1.4 37.0 22.1 16.3 1.9 1.8 15,416.4 1,099.4

59 BIRD BUY 2,890 3,500 21.1% -28.9 23.6 27.2 22.0 1.3 1.3 7,231.1 515.7

60 JSMR NEUTRAL 5,225 5,700 9.1% -13.1 6.6 21.6 20.3 2.2 2.1 37,922.4 2,704.5

* As of market closing on December 13,2019

** IPO price at IDR 1,500 per share

% ChgNo Ticker Rating Current Price* Target PriceEPS Growth (%) PER (x) PBV (x) Market Capitalization

13

This page is intentionally left blank

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Ra nk Bra nd Ma rke t Sha re YoY Growth

1 TOYOTA 32.4% - 6.2%

2 DAIHATSU 17.7% - 10.7%

3 HONDA 13.2% - 16.1%

4 MITSUBISHI MOTORS 11.8% - 19.0%

5 SUZUKI 9.4% - 19.5%

6 MITSUBISHI FUSO 4.3% - 18.0%

7 HINO 3.0% - 21.0%

8 ISUZU 2.4% - 5.0%

9 WULING 1.9% 17.8%

10 NISSAN 1.3% 98.0%

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other metric, we expect better liquidity condition in FY20F stemming from 1) accelerating government capex spending post election year, 2) declining popularity of non-bank fixed return products, and 3) more modest retail bond issuance by MoF. Subsequently, we expect ~100 bps improvement in FY20F loan growth for banks under our coverage with bottom line improving from 6.2% YoY in FY19E to 15.7% YoY in FY20F (ex BBTN: 8.1% YoY in FY19E and 14.4% YoY in FY20F). We raise our call to OVERWEIGHT with BMRI (BUY, FY20 TP: 8,650) and BBNI (BUY, FY20 TP: 9,150) as our top picks. Downside risks to our call include 1) foreign capital outflow from JCI due to further downsize in MSCI, 2) weaker-than-expected purchasing power, and 3) change in bond/currency outlook on the back of materializing recession risks and global economic slowdown. Relative valuation metrics

FY19E: lackluster growth due to tight liquidity and weak loan demand. As of 9M19, outstanding loan and deposit grew by 4.2% YTD and 4.6% YTD respectively. Increase in the outstanding loan nearly halved the same period last year as liquidity tightened and demand was held back by economic uncertainty and heightened geopolitical risks. As loan growth slowed down, higher CoF stemming from 175 bps rate hike in the previous term pressurized NII in 1H19, while 100 bps rate cuts in 2H19 have yet to take effect as LDR soared (9M19: 94.7%). As of 9M19, NII and profit after tax grew by 3.1% YoY and 6.4% YoY respectively. On asset quality, NPL and SML rose by 29 bps YTD and 143 bps YTD respectively primarily due to Krakatau Steel and Duniatex downgrades. As loan repricing was done in a very conservative manner during the previous cycle, rate cuts impact on yield is expected to be minimal. Hence, stable NIM in 4Q19E. FY20F: better earnings visibility post IFRS 9 adoption. Aside from negative impact on book value, we expect IFRS 9 to bring in more positive catalysts than what have been priced in by the market. From valuation perspective, while P/BV multiples are set to rise following the dilution, higher ROE’s should settle the valuation gap. On the flip side, taking into account higher NPL formation in 2H19, IFRS 9 can be taken as a momentum to build up provisioning without hurting P&L. As such, the built up LLC will create room for banks to lower credit cost as bigger portion of LAR will be covered under the new accounting method. As for

18

Banking Sector

IFRS 9: One Step Back, Two Steps Forward

OVERWEIGHT


BMRIBBRI

BBCA

BBNI

BBTN

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Banking | Sector Outlook

Percentage of loans being financed by low cost deposits

BMRI (BUY, FY20 TP: 8,650) and BBNI (BUY, FY20 TP: 9,150) as our top picks. As we look beyond FY19, we find BMRI and BBNI to be good stock picks going into 2020 given the risk-reward associated with each bank. Aside from discounted valuations of 0.5 SD and 1.0 SD respectively, BMRI and BBNI offer clear earning visibility with comforting margin of error. Post IFRS 9, we expect CoC to decline by 50 bps YoY for BMRI (~15% of FY19E NPAT) and 37 bps YoY for BBNI (~15% of FY19E NPAT). Meanwhile, NII and NIM are likely to remain stable with mid-to-high single digit growth in FY20F supported by better loan demand as impact from monetary easing materializes and improving liquidity condition as competition from non-bank loosen.

Impact of IFRS 9 adoption

Minimal upside on NIM despite 100 bps 7DRRR cuts in 2H19. While OTC rates have been lowered by up to 50 bps for shorter tenor TD’s (1-6M), longer TD’s (12M), however, sees a little to no change across BUKU I-IV banks as liquidity has yet to ease. This paired with bigger third-party-fund contribution from institutions constrained banks’ ability to lower CoF. Thus, we expect 4Q19 NIM to give a better color for short- to medium-term NIM outlook as asset/liability growth consolidates in the quarter. In the meantime, we expect loan and deposit to grow at similar pace given that LDR and LFR are at the upper end of the spectrum. As for banks under our coverage, our model shows stable NIM outlook for BMRI, BBNI, and BBTN, while BBRI and BBCA may see slight margin deterioration (~20 bps vs our FY19E) on the back of new KUR scheme for BBRI and historical margin trend for BBCA during easing cycles. TD rate changes QoQ (bps)

Normalizing interest expense as liquidity eases. Banking interest expense in 9M19 soared by 24.9% YoY, much higher than the past 3-yr (FY16-18) average rise of 4.7% YoY. This was primarily caused by two things, 1) Big-4 banks grabbing TD market share aggressively from BUKU I-III to accommodate incoming loan demand, which is illustrated from the chart below as % of loans funded by CASA continued to drop as Big-4 banks dominate TD. 2) Pressure on CoF was amplified by the 175 bps 7DRRR hikes, which caused banks to raise TD rates even further. Onwards, we expect the trend to change course as tight liquidity calls for a more balanced growth between loan and deposit. Our model suggests interest expense to rise by 6.0%-8.8% in FY20F versus 16.5%-22.4% in FY19E for banks under our coverage.

19


Ticker Rating CP TP % Chg FY20F P/BV

BMRI BUY 7,375 8,650 17.3 2.0

BBRI NEUTRAL 4,280 4,540 6.1 2.6

BBCA ADD 31,800 35,675 12.2 4.6

BBNI BUY 7,650 9,150 19.6 1.4

BBTN NEUTRAL 2,170 2,300 6.0 1.3

Banking Sector

Ticker Equity (IDR Tn) BV Dilution (%)

BMRI 29.0 14.2

BBRI 8.0 3.9

BBCA 6.0 3.5

BBNI 12.5 10.3

BBTN 4.5 18.3

Source: Sinarmas Investment Research

IDR Time Deposit 1Q19 2Q19 3Q19

1 Month -13 -9 -38

3 Month +6 -9 -24

6 Month +30 -8 -15

12 Months +25 +16 +2


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20

Share Price Performance

Current Price 7,375

52‐Week Target Price 8,650

% Change 17.3%

Banking Sector

PT Bank Mandiri Tbk.

Stock Informa on

Bloomberg Ticker BMRI IJ

52‐Week High 8,175

52‐Week Low 6,275

FY20F P/E 11.8x

FY20F P/BV 2.0x

Share Outstanding (Mn) 46,666.7

Market Cap. (IDR Tn) 344.2

FY19E: stable earnings growth backed by healthy NIM and prudent CoC. As of 10M19, total loan grew by 4.6% YoY (up 1.3% YTD), while customer deposit grew by 6.1% YoY (up 5.8% YTD). From liquidity perspective, LDR came down to 93.1% in 10M19 (dn 415 bps YTD, dn 131 bps YoY). To add, BMRI still has sizeable variable rate government bonds (yield: 5.8%) that will mature gradually until Jul-20 as liquidity buffer and can be used to support asset growth. As bank tries to avoid TD price war through other types of funding outside customer deposit, NIM is relatively stable compared to its peers. In the meantime, we expect no major downgrades in 4Q19 and credit cost should remain within management guidance of 1.5%-1.7% for FY19E (10M19: 1.4%). FY20F: an extension of FY19 with bottom line improvement stemming from lower credit cost. We expect FY20F growth rate to be similar to FY19E for BMRI with ~100 bps improvement driven by corporate segment. As for deposit collection, we expect stable CoF from FY19 as competition in TD pricing should further soften in FY20F catalyzed by 1) 100 bps 7DRRR cuts in 2H19 and 2) less competition from non-bank fixed return products as well as retail bonds. On profitability front, as NPL formation deteriorates and bank allocates required amount of provision to comply with IFRS 9, FY20F earning is expected to grow above industry rate benefiting from lower credit cost. Thus, we think the risk-reward for Bank Mandiri is attractive given the earning visibility and discounted valuation (-0.5 SD) at current market price. We reiterate our BUY rating on PT Bank Mandiri (Persero) Tbk (BMRI) with 52-week TP of IDR 8,650, implying 2.0x FY20F P/BV (17.3% upside potential). As for FY20F, we estimate BMRI’s NPAT at IDR 33.1tn (up 15.8% from our FY19E) with NIM, NPL, and credit cost at 538 bps (dn 5 bps YoY), 262 bps (dn 8 bps YoY), and 120 bps YoY (dn 50 bps YoY) respectively. Impact on equity from IFRS 9 adoption is estimated at IDR 29.0tn or equivalent to 14% BV dilution. Post IFRS 9, we expect credit cost to normalize at 120 bps baking in 1% new NPL formation and 120% coverage ratio.

Highlights (IDR Tn) 2018 2019E 2020F 2021F 2022F

Total Loans 799.6 855.5 941.1 1,032.6 1,133.1

Total Customer Deposits 840.9 894.5 988.0 1,095.2 1,208.8

Net Interest Income 54.6 59.1 62.7 67.2 73.8

Pre-provision Op. Profit 48.3 51.4 53.9 58.2 64.5

Net Income 25.0 28.5 33.1 35.6 39.5

Net Interest Margin (%) 5.4 5.4 5.4 5.4 5.4

Gross NPL (%) 2.8 2.7 2.6 2.5 2.5

Credit Cost (%) 1.9 1.7 1.2 1.2 1.2

Return on Equity (%) 14.6 15.0 16.5 16.9 16.6

Return on Assets (%) 2.2 2.4 2.6 2.5 2.6

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BMRI IJ Price Volume Graph

Volume BMRI

21

Income Statement Financial Ratios

Balance Sheet Loan Portfolio and NPL

Banking | Bank Mandiri

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Interest Income 81.0 90.5 96.9 104.8 115.2

% change 11.8% 7.0% 8.2% 10.0%

Interest Expense 26.4 31.4 34.2 37.6 41.4

% change 19.2% 8.8% 10.0% 10.1%

Net Int. Income 54.6 59.1 62.7 67.2 73.8

% change 8.2% 6.0% 7.2% 9.9%

Other Op. Income 31.2 31.7 32.6 34.5 36.3

% change 1.4% 3.0% 5.7% 5.3%

Operating Expense 52.0 53.5 52.2 55.3 58.6

% change 3.0% -2.5% 6.0% 6.0%

PPOP 48.3 51.4 53.9 58.2 64.5

% change 6.3% 5.0% 8.0% 10.8%

Net Op. Income 33.9 37.3 43.1 46.4 51.5

% change 10.0% 15.7% 7.5% 11.1%

Pre-tax Income 33.9 37.2 43.1 46.4 51.5

% change 9.7% 15.8% 7.5% 11.1%

Net Income 25.0 28.5 33.1 35.6 39.5

% change 14.1% 15.8% 7.5% 11.1%

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Cash 27.3 22.4 27.7 28.7 24.4

CA w/ Central Bank 59.9 52.1 51.0 53.6 56.3

CA w/ Other Banks 14.8 14.9 15.7 17.4 19.0

Interbank Placement 22.5 37.6 37.6 38.6 40.5

Total Loans - Net 767.8 822.1 875.3 963.2 1,059.8

Marketable Sec. 65.9 62.3 66.5 73.3 80.8

Government Bonds 114.3 142.4 152.0 167.6 184.8

Fixed Assets 38.4 40.4 42.2 43.9 45.4

Total Assets 1,202.3 1,290.5 1,379.7 1,517.3 1,666.3

Demand Deposits 200.5 213.5 239.2 267.9 294.6

Saving Deposits 338.6 350.5 382.0 420.2 462.2

Time Deposits 301.8 330.5 366.8 407.2 452.0

Total Deposits 840.9 894.5 988.0 1,095.2 1,208.8

Deposit from Others 16.9 18.4 19.5 21.4 23.5

Marketable Sec. 19.1 32.5 34.4 37.7 41.3

Fund Borrowings 51.7 54.1 56.7 59.4 62.3

Sub. Debts 0.7 0.7 0.7 0.7 0.7

Total Liabilities 1,017.3 1,082.1 1,175.2 1,285.9 1,404.8

Total Equity 185.0 208.4 204.5 231.4 261.6

(%) 2018 2019E 2020F 2021F 2022F

LDR 95.1 95.6 95.3 94.3 93.7

LFR 86.0 85.5 85.6 85.0 84.8

CASA 64.1 63.1 62.9 62.8 62.6

NIM 5.4 5.4 5.4 5.4 5.4

Avg. Loan Yield 9.5 9.5 9.4 9.4 9.4

Avg. CoF 2.6 2.9 2.8 2.8 2.8

Gross NPL 2.8 2.7 2.6 2.5 2.5

Credit Cost 1.9 1.7 1.2 1.2 1.2

Coverage Ratio 144.6 144.8 266.5 268.1 258.2

Cost to Income 69.8 69.5 66.7 66.7 66.0

Cost Efficiency 60.5 58.9 54.8 54.4 53.2

Return on Assets 2.2 2.4 2.6 2.5 2.6

Return on Equity 14.6 15.0 16.5 16.9 16.6

Profit Margin 31.9 32.6 35.3 35.1 35.4

Asset Turnover 7.0 7.3 7.3 7.2 7.2

Equity Multiplier (x) 6.6 6.3 6.5 6.6 6.5

PBV (x) 2.2 2.0 2.0 1.8 1.6

PE (x) 15.6 13.7 11.8 11.0 9.9

(%) 2018 2019E 2020F 2021F 2022F

Small 6.9 7.0 7.0 7.0 7.0

% NPL 2.8 1.9 1.9 1.9 1.9

Micro 12.5 13.9 13.9 13.9 13.9

% NPL 0.9 0.9 0.9 0.9 0.9

Consumer 10.7 10.5 11.3 11.3 11.3

% NPL 2.2 2.5 2.2 2.2 2.2

Commercial 17.4 16.6 15.7 15.7 15.7

% NPL 10.5 10.9 10.5 10.0 10.0

Corporate 39.7 39.2 39.2 39.2 39.2

% NPL 0.2 0.1 0.3 0.2 0.2

International 0.5 0.5 0.5 0.5 0.5

% NPL - - - - -

Subsidiaries 12.3 12.3 12.3 12.3 12.3

% NPL 2.5 2.9 2.9 2.9 2.9

Collectability 1 93.3 92.6 92.7 92.8 92.8

Collectability 2 3.9 4.7 4.7 4.7 4.7

Collectability 3-5 2.8 2.7 2.6 2.5 2.5

22


Current Price 4,280


% Change 6.1%

Banking Sector

PT Bank Rakyat Indonesia Tbk.

Stock Informa on

Bloomberg Ticker BBRI IJ


52‐Week Low 3,520

FY20F P/E 15.1x

FY20F P/BV 2.6x



FY19E: inline performance though 4Q19 should see slower asset growth. As of 10M19, total loan portfolio grew by 8.7% YoY (up 5.8% YTD), whereas deposit grew by 6.1% YoY (up 50 bps YTD), causing LDR to rise to 94.3% (up 2.2% YoY, up 4.7% YTD). From micro segment, while deposit grew above industry rate (9.8% YoY vs 7.5% YoY), LDR rose to 107.0% in 9M19 as micro loans grew by 13.2% YoY during the period. Micro loans, however, are expected to slow down in 4Q19 as bank has fulfilled 95% of FY19 KUR quota by Oct-19. From asset quality perspective, we expect NPL to improve by 30 bps to 2.8% in 4Q19 following Krakatau Steel and Duniatex downgrades (63% and 100% LLC respectively). New KUR scheme may serve as headwinds for Micro and NIM. Government has decided to lower KUR lending rate for FY20 by 100 bps to 6%, while keeping interest subsidy unchanged at 10.5%/5.5%/14% for Micro/Retail/TKI KUR. Moreover, maximum ticket size for Micro KUR will be increased from IDR 25mn to IDR 50mn starting 2020. Higher credit limit for Micro KUR may pose a risk of cannibalization. The new asset yield from Micro KUR is at 6%+10.5%, whereas Kupedes’ asset yield is at 20%-22%. From ticket size perspective, while maximum credit limit for Kupedes is at IDR 250mn, average ticket size still stands at IDR 55mn, relatively close to Micro KUR maximum credit limit. Therefore, loan growth and NIM may get affected given the likelihood of shifting borrowers from Kupedes to KUR as it has 15% rate difference from borrowers’ point of view. We downgrade PT Bank Rakyat Indonesia (Persero) Tbk (BBRI) from ADD to NEUTRAL with 52-week TP of IDR 4,540, implying 2.6x FY20F P/BV (6.1% upside potential). As for FY20F, we forecast BBRI’s NPAT at IDR 37.0tn (up 8.7% from our FY19E) with NIM, NPL, and credit cost at 659 bps (dn 20 bps YoY), 278 bps (dn 2 bps YoY), and 180 bps (dn 50 bps YoY) respectively. Impact on equity from IFRS 9 adoption is estimated at IDR 8.0tn or equivalent to 4% BV dilution. Meanwhile, we expect credit cost to normalize at 180 bps post IFRS 9 taking into account new NPL formation and additional provisioning for secondary reserves and undisbursed loans.

NEUTRAL


Total Loans 840.2 932.6 1,035.2 1,158.0 1,296.5

Total Customer Deposits 944.3 999.3 1,118.4 1,266.5 1,424.7



Net Income 32.4 34.1 37.0 40.0 43.7


Gross NPL (%) 2.1 2.8 2.8 2.7 2.6

Credit Cost (%) 2.3 2.3 1.8 1.8 1.8

Return on Equity (%) 18.4 17.5 17.5 17.3 17.1

Return on Assets (%) 2.7 2.6 2.6 2.6 2.5

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BBRI IJ Price Volume Graph

Volume BBRI

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Banking | Bank Rakyat Indonesia



(IDR Tn) 2018 2019E 2020F 2021F 2022F

Interest Income 111.6 120.5 126.5 138.2 152.4

% change 8.0% 5.0% 9.3% 10.3%


% change 16.5% 8.2% 10.1% 10.4%

Net Int. Income 77.7 81.0 83.7 91.1 100.4

% change 4.2% 3.4% 8.8% 10.2%

Other Op. Income 24.4 26.8 28.5 30.5 32.2

% change 10.0% 6.2% 7.0% 5.7%


% change 7.8% 1.1% 8.7% 8.9%

PPOP 59.5 63.2 64.2 69.9 76.9

% change 6.1% 1.6% 8.9% 10.0%

Net Op. Income 41.7 42.8 46.5 50.1 54.8

% change 2.5% 8.6% 7.9% 9.3%

Pre-tax Income 41.8 42.8 46.5 50.1 54.8

% change 2.4% 8.7% 7.9% 9.3%

Net Income 32.4 34.1 37.0 40.0 43.7

% change 5.3% 8.7% 7.9% 9.3%

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Cash 27.4 13.1 28.5 42.3 48.1

CA w/ Central Bank 71.2 70.4 72.7 77.8 83.7

CA w/ Other Banks 12.7 15.0 15.8 16.6 17.4


Total Loans - Net 804.7 888.9 978.7 1,095.7 1,227.7

Marketable Sec. 184.3 175.1 170.7 170.7 170.7


Fixed Assets 26.9 28.3 29.7 31.2 32.7

Total Assets 1,296.9 1,352.3 1,476.7 1,643.0 1,825.4

Demand Deposits 180.7 180.7 202.5 224.8 249.8

Saving Deposits 387.2 417.8 464.9 523.0 578.5

Time Deposits 376.4 400.9 451.0 518.6 596.4

Total Deposits 944.3 999.3 1,118.4 1,266.5 1,424.7


Marketable Sec. 37.4 19.9 22.3 24.0 25.8

Fund Borrowings 40.5 40.5 41.5 41.5 41.5

Sub. Debts 1.5 1.5 1.5 1.6 1.6

Total Liabilities 1,111.6 1,146.9 1,257.4 1,400.1 1,556.4

Total Equity 185.3 205.5 219.3 242.9 269.0

(%) 2018 2019E 2020F 2021F 2022F

LDR 89.0 93.3 92.6 91.4 91.0

LFR 81.4 86.5 86.1 85.5 85.5

CASA 60.1 59.9 59.7 59.0 58.1

NIM 7.1 6.8 6.6 6.6 6.6

Avg. Loan Yield 13.1 12.7 12.2 12.1 12.0

Avg. CoF 2.8 3.0 2.9 2.9 2.9

Gross NPL 2.1 2.8 2.8 2.7 2.6

Credit Cost 2.3 2.3 1.8 1.8 1.8

Coverage Ratio 197.3 159.9 188.6 193.0 198.6

Cost to Income 69.3 71.0 70.0 70.3 70.3

Cost Efficiency 59.1 60.3 58.6 58.8 58.7

Return on Assets 2.7 2.6 2.6 2.6 2.5

Return on Equity 18.4 17.5 17.5 17.3 17.1

Profit Margin 29.1 28.3 29.3 29.0 28.7

Asset Turnover 9.2 9.1 8.9 8.9 8.8


PBV (x) 3.1 2.8 2.6 2.3 2.1

PE (x) 17.3 16.4 15.1 14.0 12.8

(%) 2018 2019E 2020F 2021F 2022F

Micro 34.1 35.2 36.8 38.4 40.0

% NPL 1.0 1.3 1.3 1.3 1.3

Consumer 16.3 16.0 15.6 15.2 14.8

% NPL 1.0 1.4 1.4 1.4 1.4

Small Commercial 22.8 22.6 22.0 21.4 20.8

% NPL 3.1 3.7 4.0 4.0 4.0

Medium 2.3 2.6 2.5 2.5 2.4

% NPL 6.8 5.3 5.3 5.3 5.3

SOE 13.3 12.6 11.7 10.9 10.0

% NPL 1.1 1.0 1.5 1.5 1.5

Corporate Non-SOE 11.3 11.0 11.3 11.7 12.0

% NPL 5.5 10.5 9.5 8.5 7.5

Collectability 1 95.3 93.8 93.8 94.0 94.2

Collectability 2 2.5 3.4 3.4 3.3 3.2

Collectability 3-5 2.1 2.8 2.8 2.7 2.6

24


Current Price 31,800


% Change 12.2%

Banking Sector

PT Bank Central Asia Tbk.

Stock Informa on

Bloomberg Ticker BBCA IJ


52‐Week Low 24,900

FY20F P/E 26.4x

FY20F P/BV 4.6x



FY19E: stellar performance supported by strong top line growth. As of 10M19, total loan portfolio grew by 8.4% YoY (up 5.3% YTD), whereas customer deposit grew by 10.2% YoY (up 7.8% YTD). Subsequently, LDR stood at 83.4% as of 10M19 (dn 1.4% YoY, dn 2.0% YTD) with healthy CASA ratio of 75.8%. Profitability wise, NII and profit after tax grew by 13.7% YoY and 13.9% YoY respectively. While asset quality remained robust with an NPL ratio of 1.6% (vs 2.7% industry) as of 3Q19, management raised bank-only credit cost from 101 bps in FY18 to 124 bps in 10M19 as they built provision for downgraded debtors that are previously in category 2 loans and have been in the watch list for awhile. NIM is expected to soften amid easing cycle. Margin-wise, BBCA is known to be one of the most resilient banks when it comes to key rate changes supported by ample liquidity and healthy CASA ratio. During easing cycle, however, NIM tends to soften due to bank’s asset and liability profile. Baking in 100 bps 7DRRR cuts in 2H19, we expect minor drop in NIM (~10 bps) in FY20F. Nonetheless, margin compression should remain minimal as we expect better loan demand in FY20F stemming from easing domestic political uncertainty and pick up in working capital as well as consumption loans. As for bank’s core performance, we expect similar trend in FY19E to be carried out in FY20F. We raise PT Bank Central Asia Tbk (BBCA) from NEUTRAL to ADD with 52-week TP of IDR 35,675, implying 4.6x FY20F P/BV (12.2% upside potential). As for FY20F, we forecast BBCA’s NPAT at IDR 33.3tn (up 16.9% YoY from our FY19E) with NIM, NPL, and credit cost at 657 bps (dn 12 bps YoY), 149 bps (dn 13 bps YoY), and 80 bps (dn 40 bps YoY) respectively. Impact on equity from IFRS 9 adoption is estimated at IDR 6.0tn or equivalent to 3% BV dilution. Simultaneously, we expect credit cost to normalize at 80 bps after the adjustment. While bank is traded at +2.0 SD, strong earning visibility with >18.0% ROE makes BBCA continuously attractive especially under low rate environment. Downside risk to our estimate includes IFRS 9 adjustment on non-loan earning assets and undisbursed loans.

ADD


Total Loans 543.0 597.3 657.0 735.1 821.3

Total Customer Deposits 635.0 695.4 763.5 845.6 939.4



Net Income 25.9 28.5 33.3 37.5 43.0


Gross NPL (%) 1.4 1.6 1.5 1.5 1.5

Credit Cost (%) 0.5 1.2 0.8 0.8 0.8

Return on Equity (%) 18.3 17.6 18.4 18.5 18.6

Return on Assets (%) 3.3 3.3 3.5 3.6 3.7

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BBCA IJ Price Volume Graph

Volume bbca

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Banking | Bank Central Asia



(IDR Tn) 2018 2019E 2020F 2021F 2022F

Interest Income 56.8 64.1 68.9 76.2 85.0

% change 12.9% 7.5% 10.5% 11.6%


% change 17.2% 8.5% 10.3% 10.9%

Net Int. Income 45.3 50.6 54.3 60.1 67.2

% change 11.8% 7.3% 10.6% 11.8%

Other Op. Income 17.7 21.9 24.9 27.6 30.7

% change 23.6% 13.4% 10.8% 11.4%


% change 21.2% 1.5% 8.2% 8.1%

PPOP 35.4 42.7 46.9 52.8 60.4

% change 20.6% 9.9% 12.6% 14.4%

Net Op. Income 32.7 35.8 41.9 47.2 54.2

% change 9.5% 16.9% 12.8% 14.7%

Pre-tax Income 32.7 35.8 41.9 47.2 54.2

% change 9.5% 16.9% 12.8% 14.7%

Net Income 25.9 28.5 33.3 37.5 43.0

% change 10.1% 16.9% 12.8% 14.7%

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Cash 21.7 29.1 32.7 35.3 41.7

CA w/ Central Bank 43.5 46.3 48.8 51.0 53.1

CA w/ Other Banks 8.5 11.0 11.6 12.2 12.7


Total Loans - Net 529.4 581.5 633.6 709.6 793.5

Marketable Sec. 109.1 118.0 132.8 146.5 163.2

Government Bonds - - - - -

Fixed Assets 19.3 20.3 21.3 22.4 23.5

Total Assets 824.8 908.9 996.1 1,105.4 1,231.0

Demand Deposits 166.8 182.3 204.3 230.7 260.3

Saving Deposits 316.8 339.0 367.7 404.2 443.2

Time Deposits 151.4 174.1 191.5 210.7 236.0

Total Deposits 635.0 695.4 763.5 845.6 939.4


Marketable Sec. 0.2 0.0 0.0 0.0 0.0

Fund Borrowings 2.1 3.0 3.1 3.3 3.5

Sub. Debts - - - - -

Total Liabilities 673.0 737.1 806.3 889.2 984.1

Total Equity 151.8 171.8 189.7 216.3 247.0

(%) 2018 2019E 2020F 2021F 2022F

LDR 85.5 85.9 86.1 86.9 87.4

LFR 84.3 84.5 84.6 85.5 86.0

CASA 76.2 75.0 74.9 75.1 74.9

NIM 6.5 6.7 6.5 6.5 6.5

Avg. Loan Yield 8.9 9.1 8.9 8.9 8.9

Avg. CoF 1.6 1.7 1.6 1.6 1.6

Gross NPL 1.4 1.6 1.5 1.5 1.5

Credit Cost 0.5 1.2 0.8 0.8 0.8

Coverage Ratio 178.7 163.6 239.5 232.9 227.1

Cost to Income 56.1 58.4 55.4 54.5 53.2

Cost Efficiency 48.1 50.7 47.1 46.1 44.6

Return on Assets 3.3 3.3 3.5 3.6 3.7

Return on Equity 18.3 17.6 18.4 18.5 18.6

Profit Margin 45.5 44.4 48.3 49.3 50.6

Asset Turnover 7.2 7.4 7.2 7.2 7.3


PBV (x) 5.8 5.1 4.6 4.1 3.6

PE (x) 34.0 30.9 26.4 23.4 20.4

(%) 2018 2019E 2020F 2021F 2022F

Corporate 39.7 41.0 41.0 41.0 41.0

% NPL 1.3 1.5 1.4 1.4 1.4

Commercial & SME 34.2 34.1 34.1 34.1 34.1

% NPL 1.6 1.9 1.6 1.6 1.6

Consumer 26.2 24.9 24.9 24.9 24.9

% NPL 1.2 1.5 1.5 1.5 1.5

Mortgage 16.3 16.1 16.1 16.1 16.1

Vehicle 7.4 6.5 6.5 6.5 6.5

Credit Card 2.4 2.3 2.3 2.3 2.3

Collectability 1 96.8 96.0 96.4 96.6 96.6

Collectability 2 1.8 2.3 2.1 1.9 1.9

Collectability 3-5 1.4 1.6 1.5 1.5 1.5

26


Current Price 7,650


% Change 19.6%

Banking Sector

PT Bank Negara Indonesia Tbk.

Stock Informa on

Bloomberg Ticker BBNI IJ


52‐Week Low 6,650

FY20F P/E 9.4x

FY20F P/BV 1.4x



FY19E: slower growth capped by liquidity. As of 10M19, total outstanding loan grew by 12.5% YoY (up 7.9% YTD), while customer deposit increased by 3.2% YoY (up 1.7% YTD). Major drag on deposit collection came from saving deposit, which as of 10M19 dropped by 8.5% YTD (up 2.0% YoY) for the bank-only portion. Demand deposit, on the other hand, grew nicely at 4.2% YTD (up 12.4% YoY), keeping CASA ratio at 64.3% (up 222 bps YoY, dn 97 bps YTD). To date, LDR surged to 96.9% (up 800 bps YoY, up 811 bps YTD) as growth gap between loan and deposit widened. From asset quality perspective, we expect NPL to stay below 200 bps in 4Q19 following Krakatau Steel and Duniatex downgrades (26% LLC for both debtors). FY20F: better earning visibility on the back of stabilizing NIM and lower credit cost. Previously, management’s growth focus tilted more toward asset growth (lending) than it did to deposit, causing customer profile to be less sticky and price sensitive. Going forward, management aims to introduce more retail banking products in an effort to grow CASA deposit. Meanwhile, as one of the largest payroll banks, management believes that BBNI needs to work on retaining payrolls from fleeing to other transactional banks. On profitability front, as NPL formation deteriorates and higher LLC is allocated amid IFRS 9 adoption, we view FY20F earning to grow above industry level stemmed by stable and lower credit cost. With that being said, we think BBNI should outperform its peers given the earning visibility and discounted valuation (-1.0 SD). We raise our rating for PT Bank Negara Indonesia (Persero) Tbk (BBNI) from ADD to BUY with 52-week TP of IDR 9,150, implying 1.4x FY20F P/BV (19.6% upside potential). As for FY20F, we forecast BBNI’s NPAT at IDR 18.2tn (up 20.1% YoY from our FY19E) with NIM, NPL, and credit cost at 507 bps (up 13 bps YoY), 207 bps (up 21 bps YoY), and 120 bps (dn 37 bps YoY) respectively. Impact on equity from IFRS 9 adoption is estimated at IDR 12.5tn or equivalent to 10% BV dilution. Post IFRS 9, we expect credit cost to normalize at 120 bps baking in 1% new NPL formation and 120% coverage ratio.

BUY


Total Loans 512.8 569.2 637.5 719.3 812.7




Net Income 15.0 15.1 18.2 20.5 23.7


Gross NPL (%) 2.0 1.9 2.1 2.0 2.0

Credit Cost (%) 1.5 1.6 1.2 1.2 1.2

Return on Equity (%) 14.3 13.0 14.7 15.4 15.8

Return on Assets (%) 2.0 1.8 2.1 2.2 2.2

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BBNI IJ Price Volume Graph

Volume BBNI

27

Banking | Bank Negara Indonesia



(IDR Tn) 2018 2019E 2020F 2021F 2022F

Interest Income 54.1 57.6 62.7 68.7 76.9

% change 6.4% 8.9% 9.5% 11.9%


% change 17.8% 8.5% 8.2% 9.0%

Net Int. Income 35.4 35.6 38.8 42.9 48.7

% change 0.3% 9.2% 10.3% 13.6%

Other Op. Income 17.6 18.9 20.4 22.4 24.6

% change 7.2% 8.2% 9.9% 9.8%


% change 5.8% 3.0% 8.6% 9.9%

PPOP 27.0 27.5 30.1 33.9 39.0

% change 2.0% 9.1% 12.7% 15.2%

Net Op. Income 19.6 19.1 22.8 25.7 29.8

% change -2.8% 19.7% 12.7% 15.9%

Pre-tax Income 19.8 19.0 22.8 25.7 29.8

% change -4.2% 20.1% 12.7% 15.9%

Net Income 15.0 15.1 18.2 20.5 23.7

% change 0.7% 20.1% 12.7% 15.9%

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Cash 14.0 8.9 12.2 17.0 25.9

CA w/ Central Bank 35.6 35.6 36.9 38.8 40.4

CA w/ Other Banks 13.1 13.1 13.6 14.3 14.9


Total Loans - Net 497.9 552.9 606.7 686.2 777.0

Marketable Sec. 32.0 28.8 28.8 28.8 28.8


Fixed Assets 26.1 26.1 26.1 27.4 28.8

Total Assets 808.6 837.1 904.6 1,008.4 1,130.3

Demand Deposits 169.3 189.2 212.8 244.3 279.2

Saving Deposits 206.1 206.1 229.0 254.3 286.1

Time Deposits 203.4 199.4 219.6 252.5 287.9

Total Deposits 578.8 594.6 661.4 751.1 853.1


Marketable Sec. 3.0 3.0 3.0 3.0 3.0

Fund Borrowings 52.0 46.8 50.8 55.9 61.6



Total Equity 110.4 123.6 125.5 141.8 160.8

(%) 2018 2019E 2020F 2021F 2022F

LDR 88.6 95.7 96.4 95.8 95.3

LFR 79.1 86.3 87.2 86.9 86.7

CASA 64.8 66.5 66.8 66.4 66.3

NIM 5.3 4.9 5.1 5.1 5.2

Avg. Loan Yield 10.1 9.7 9.7 9.7 9.7

Avg. CoF 2.7 3.1 3.2 3.1 3.0

Gross NPL 2.0 1.9 2.1 2.0 2.0

Credit Cost 1.5 1.6 1.2 1.2 1.2

Coverage Ratio 148.3 153.7 233.3 227.2 221.7

Cost to Income 72.7 75.1 72.6 71.8 70.6

Cost Efficiency 63.1 65.0 61.5 60.6 59.3

Return on Assets 2.0 1.8 2.1 2.2 2.2

Return on Equity 14.3 13.0 14.7 15.4 15.8

Profit Margin 27.9 26.4 29.1 29.9 31.0

Asset Turnover 7.1 7.0 7.2 7.2 7.2


PBV (x) 1.6 1.4 1.4 1.2 1.1

PE (x) 11.3 11.2 9.4 8.3 7.2

(%) 2018 2019E 2020F 2021F 2022F

Corporate 29.6 32.4 32.1 31.8 31.5

% NPL 1.7 1.4 1.6 1.5 1.4

SOE 21.6 19.8 19.0 18.2 17.4

% NPL 0.0 0.0 0.0 0.0 0.0

Medium 14.6 13.4 13.4 13.4 13.4

% NPL 2.6 3.9 4.4 4.4 4.4

Small 12.9 13.4 14.0 14.6 15.2

% NPL 1.6 2.2 2.4 2.4 2.4

Consumer 15.5 15.0 15.5 16.0 16.5

% NPL 2.1 2.1 2.1 2.1 2.1

Subsidiaries 5.8 6.0 6.0 6.0 6.0

% NPL - - - - -

Collectability 1 94.1 94.0 94.0 94.2 94.2

Collectability 2 3.9 4.1 3.9 3.8 3.8

Collectability 3-5 2.0 1.9 2.1 2.0 2.0

28


Current Price 2,170


% Change 6.0%

Banking Sector

PT Bank Tabungan Negara Tbk.

Stock Informa on

Bloomberg Ticker BBTN IJ


52‐Week Low 1,780

FY20F P/E 10.8x

FY20F P/BV 1.3x



FY19E: a year of consolidation. As of 10M19, bank-only loan portfolio grew by 13.9% YoY (up 7.7% YTD), whereas customer deposit grew by 15.4% YoY (dn 2.9% YTD). As a result, LDR declined by 1.5% on a YoY basis to 113.1%, but increased by 11.1% on a YTD basis. On asset quality, NPL came down to 3.2% in 10M19 (9M19: 3.5%) and is at the upper range of management guidance of 3.1%-3.2% for FY19E. As a move towards IFRS 9, management aims to increase LLC above 70% by 2019 and 130% by 2020. Accordingly, credit cost stood at 128 bps as of 10M19 and is expected to reach 135 bps by year end. To add, asset growth is expected to slow down in 4Q19 as bank almost fulfilled One Million Housing program quota for this year (IDR 1.5tn remaining) and capital constrain due to postponed rights issue plan. As bank consolidates, management guided IDR 1.12tn NPAT (dn 60% YoY). FY20F: limited asset growth due to liquidity scarcity in the balance sheet. As bank’s plan for capital injection has been put on hold, management expects a modest 5%-7% loan growth in FY20F (from 17.1% FY15-19E CAGR) and 7%-9% YoY deposit growth. In the meantime, new management plans to enhance its retail banking business in order to get cheaper deposit. At current, aside from 42.9% CASA ratio (industry: 55.4%), 80% of bank’s TD came from institutions with higher CoF profile. As bank relies more on retail, CoF and NIM should be more stable going forward. Simultaneously, new management also guided that short-term focus will be on asset quality rather than asset growth. We reiterate our NEUTRAL call on PT Bank Tabungan Negara (Persero) Tbk (BBTN) with 52-week TP of IDR 2,300, implying 1.3x FY20F P/BV (6.0% upside potential). As for FY20F, we forecast BBTN’s NPAT at IDR 2.6tn (up 126.7% from our FY19E and ~20% lower than management guidance of IDR 3.0-3.5tn). Meanwhile, we expect FY20F NIM, NPL, and credit cost at 332 bps (up 4 bps YoY), 340 bps (up 9 bps YoY), and 90 bps (dn 45 bps YoY) respectively. Impact on equity from IFRS 9 adoption is estimated at IDR 4.5tn or equivalent to 18% BV dilution. Post IFRS 9, we expect credit cost to normalize at 80 bps to 90 bps.

NEUTRAL


Total Loans 237.8 261.5 281.1 314.9 353.2




Net Income 2.8 1.2 2.6 3.2 3.8


Gross NPL (%) 2.9 3.3 3.4 3.1 2.9

Credit Cost (%) 0.8 1.4 0.9 0.9 0.9

Return on Equity (%) 12.3 4.8 11.2 12.7 13.3

Return on Assets (%) 1.0 0.4 0.8 0.9 0.9

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BBTN IJ Price Volume Graph

Volume BBTN

29

Banking | Bank Tabungan Negara



(IDR Tn) 2018 2019E 2020F 2021F 2022F

Interest Income 22.9 25.2 27.1 29.1 32.4

% change 10.5% 7.2% 7.7% 11.0%


% change 22.4% 6.0% 6.9% 11.1%

Net Int. Income 10.1 9.6 10.5 11.4 12.7

% change -4.7% 9.2% 9.0% 10.9%

Other Op. Income 2.1 2.2 2.4 2.5 2.7

% change 5.8% 7.9% 7.4% 6.5%


% change 20.5% -7.5% 5.1% 5.8%

PPOP 5.3 4.9 5.8 6.6 7.8

% change -8.4% 18.7% 15.1% 17.5%

Net Op. Income 3.6 1.5 3.3 4.0 4.8

% change -58.5% 123.2% 18.9% 21.1%

Pre-tax Income 3.6 1.5 3.3 4.0 4.8

% change -59.4% 126.7% 18.9% 21.1%

Net Income 2.8 1.2 2.6 3.2 3.8

% change -58.4% 126.7% 18.9% 21.1%

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Cash 1.2 1.8 2.2 1.7 3.0

CA w/ Central Bank 15.4 15.4 15.8 17.4 18.9

CA w/ Other Banks 1.6 1.1 1.1 1.3 1.4


Total Loans - Net 234.5 256.0 269.6 302.5 339.8

Marketable Sec. 5.8 6.8 7.2 7.5 7.9


Fixed Assets 5.0 5.2 5.5 5.7 6.0

Total Assets 306.4 331.9 349.3 387.2 432.8

Demand Deposits 58.0 59.5 64.6 74.2 85.4

Saving Deposits 41.9 41.9 47.1 53.0 59.6

Time Deposits 129.9 149.4 157.6 173.4 195.0

Total Deposits 229.8 250.8 269.3 300.6 340.0


Marketable Sec. 20.6 20.8 21.0 21.1 21.3

Fund Borrowings 15.5 17.8 20.5 23.6 27.1



Total Equity 23.8 24.6 22.6 27.1 30.3

(%) 2018 2019E 2020F 2021F 2022F

LDR 103.4 104.3 104.4 104.8 103.9

LFR 88.1 88.1 88.3 89.1 89.0

CASA 43.5 40.4 41.5 42.3 42.6

NIM 4.0 3.3 3.3 3.4 3.4

Avg. Loan Yield 10.2 9.9 9.7 9.7 9.7

Avg. CoF 4.6 4.9 4.8 4.6 4.6

Gross NPL 2.9 3.3 3.4 3.1 2.9

Credit Cost 0.8 1.4 0.9 0.9 0.9

Coverage Ratio 48.4 63.4 120.4 128.1 130.8

Cost to Income 85.6 94.6 88.7 87.5 86.3

Cost Efficiency 70.4 87.4 74.2 71.7 68.9

Return on Assets 1.0 0.4 0.8 0.9 0.9

Return on Equity 12.3 4.8 11.2 12.7 13.3

Profit Margin 12.3 4.6 9.8 10.8 11.8

Asset Turnover 8.0 7.9 7.9 7.9 7.9


PBV (x) 1.0 1.0 1.3 1.1 0.9

PE (x) 8.7 20.8 10.8 9.1 7.5

(%) 2018 2019E 2020F 2021F 2022F

Housing 89.6 90.0 90.0 90.0 90.0

% NPL 2.5 3.1 3.1 2.8 2.6

Consumer 2.4 2.1 1.8 1.8 1.8

% NPL 1.3 2.4 2.4 2.2 2.0

Commercial 8.0 8.0 8.2 8.2 8.2

% NPL 7.5 6.5 6.5 6.0 6.0

Subsidized Mortgage 41.1 43.5 43.5 43.5 43.5

% NPL 0.8 0.9 0.9 0.8 0.8

Non-sub Mortgage 32.7 32.0 32.0 32.0 32.0

% NPL 2.8 3.6 4.0 3.6 3.4

Other Housing Loans 3.5 3.2 3.2 3.2 3.2

% NPL 3.6 4.3 4.3 4.0 4.0

Construction 12.3 11.3 11.3 11.3 11.3

% NPL 7.1 9.4 9.0 8.0 7.0

Collectability 1 89.5 86.2 87.1 88.5 88.7

Collectability 2 7.7 10.4 9.4 8.4 8.4

Collectability 3-5 2.9 3.3 3.4 3.1 2.9

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Coal Mining Sector

Weakness Persists as Demand Fades

NEUTRAL

What do we expect in FY20? Going forward to FY20,

we believe that global coal price could keep dimming as

we see demand to remain weak while supplies grow.

Global economy slowdown will continue to weigh down

on thermal demand, particularly from China and India.

On the other hand, current high inventories level and

additional local supplies from China’s new and more

efficient mine this year will likely drive up supplies,

lowering their need of imports. Hence, we expect global

coal price to weaken further, especially for high CV

coal. Meanwhile, Indonesia’s low CV coal price should

be more resilient as we see an improvement in

demand/supply balance driven by decelerating

production growth and new power plant roll out.

China: economy slowdown has impacted energy

demand. Prolonged trade war between US and China

has directly hit China’s economy, which leads to lower

manufacturing activities and energy demands. China’s

industrial output growth has declined to its lowest level

of all time (below 5% growth in Oct-19) while

manufacturing PMI has struggled in the contraction

area for the past 6 consecutive months. As a result,

electricity consumption growth has fallen to its 3 years

low at 3-5% YoY growth. In addition, falling gas price

and higher hydro output have also taken a small

portion of thermal demand. All of these should

translate to a weaker demand for coal in coming

months. From the supply side, the new and more

efficient mines have started to come online since 2H19,

resulting in higher supplies (+9.5% YoY). We expect

this trend to continue forward in FY20. Higher local

FY19 in a nutshell. 2019 has been a rough year for

coal sector, as coal price has moved in a continuous

negative direction during the year, closing in at USD

67.9 per ton (XW1) as of Nov-19 or down by 33.5%

from a year ago. This has led to ~30% share price

decline YTD for coal stocks under our coverage over the

past 12 months, underperforming JCI index by more

than 27%. Global economy slowdown, fueled from US-

China trade war has impacted energy demand, hitting

thermal power the most, especially in China and India,

the two biggest coal consumers in the world. On the

other hand, production growth trend remained high,

particularly in China and Indonesia, resulting in an

abundant of supplies and a high inventory level. At the

same time, the drop in gas price and the recovery of

hydropower plant in China have also taken some

portion from thermal demand.

36

-40.0%

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-5.0%

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5.0%

10.0%

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XW1 Newcastle Coal sectors (weighted) JCI Index


Coal sector underperform JCI index

Coal Mining | Sector Outlook

Indonesia starting any new stations in the first half of

2019. The region only saw 1.5 GW of capacity into

construction in 1H19, compared to 2.7 GW installed

over the whole 2018. This should pose further concern

on potential demand growth for coal, considering

Southeast Asia is the engine growth for coal usage.

Indonesia: supply growth should decelerate while

demand slowly picking up. We expect production

growth to decelerate in FY20 after a strong output

growth in FY19. Based on our estimate from all coal

companies listed in JCI (represent around 70% of

Indonesia’s total output), we saw a 11.4% YoY

production increase as of 9M19. This is also supported

by the fact that Indonesia’s export has grown by 8.2%

YoY as of 9M19. Going forward to FY20, we expect

production growth to decelerate to low single digit

growth as capex in heavy equipment for most coal

miners have significantly been reduced. On the other

hand, local demand should slowly be picking up as we

expect coal power plant roll-out will slowly come online.

We estimate an additional local demand of 60 Mt in the

next 4 years. This should help to improve local supply-

demand balance by a bit.

We reiterate our NEUTRAL recommendation for

coal sector driven by weak demand outlook and

higher supplies grow. We expect global coal price to

remain weak in FY20, averaging at USD 70 per ton,

down by 10% from FY19 avg but up by 4% from 4Q19.

Despite the depressed valuation for Indo coal stocks,

we see a lack of catalysts in the sector that could lift

share price in med-term as the sector outlook remains

cloudy at current time.

supplies paired with the current high inventory level

will translate to a weaker import from China in FY20.

India’s low electricity demand drives power plant

shut down. India’s electricity demand fell at fastest

pace in at least 12 years as power demand droppped

by 13.2% in Oct-19, reflecting a deepening slowdown

growth for the country. Even worse, consumption in

heavily industrialized states area declined by about

18%-20% YoY. Latest data on industrial production

showed that growth has been decelerating to its lowest

level in the last 8 years, declining by 4.3% YoY in Sep-

19. Weak consumption and investment have dragged

down the country’s economy. As a result, nearly half of

the country thermal power plant (~65GW) had to be

shut down as operators were faced with a low demand.

Local news reported some of the shutdown were

temporary, but others have been closed for months. In

addition, India has one of the most ambitious

renewable programs in the world, resulted in a gradual

decline in the thermal market share (63% in FY19 vs

73% in FY17). As demand fades away and local supply

recovers from better weather, we expect lower imports

from India in coming months.

Coal-fired power plant construction stalls in

Southeast Asia. According to Global Energy Monitor,

the construction of coal-fired power plants in Southeast

Asia has slowed significantly since 2016, with only

37

Ticker Rating CP TP % Chg FY20F P/E

ITMG NEUTRAL 11,050 12,000 8.6 8.5

ADRO NEUTRAL 1,590 1,650 3.8 8.8

PTBA NEUTRAL 2,580 2,700 4.7 8.0

INDY BUY 1,160 1,400 20.7 7.4

UNTR BUY 21,175 25,700 21.4 8.4

Coal mining sector

China rising coal production and inventory


3000

3200

3400

3600

3800

4000

0

5

10

15

20

25

30

Inventory at 6 Major Power Plant (Mt) 12-month Production (Mt)

India PMI and industrial output weakens in 2H19


Coal power construction slowing in Southeast Asia

Source: Global Energy Monitor, Sinarmas Investment Research

-6

-4

-2

0

2

4

6

8

10

44

46

48

50

52

54

56

Manufacturing PMI Industrial Output (%YoY)

0

2

4

6

8

10

12

14

2015 2016 2017 2018 1H19

Coal power plant construction (GW)

Coal Mining Sector

PT Indo Tambangraya Megah Tbk.

NEUTRAL

We maintain our NEUTRAL rating on PT Indo Tambangraya

Megah Tbk. (ITMG) with 52-week target price at IDR

12,000. Our TP represent 8.6% potential upside and implies 8.5x

FY20 PE, -0.2SD from its 5 years average. Despite attractive

valuation (7.7x FY20F forward PE) with a potential high dividend

yield (14% annualized yield), we see higher earnings risk next year

as we expect high CV coal price to trade lower in FY20, resulting in

a negative earnings growth YoY. In addition, the cloudy sector

outlook for high CV coal poses an additional risk for the company.

To note, during coal price downturn in FY14-16, ITMG was traded

at around 7-9x PE, hence we see limited upside for the stock at

current time. Upside risks to our call are higher than expected coal

price and better than expected global economic data.

Expecting flat output with weaker ASP. As of 9M19, ITMG

posted a total production of 18.2 Mt, 16% higher than last year.

The company guide FY19E production at 23.5 Mt (+6.3% YoY).

After a decent output recovery, we expect FY20F production to

remain flat due to reserve concern and limited capex in additional

heavy equipment. In addition, we are baking in a lower coal price

which translate to 6.6% lower ASP in FY20F. All of these should

translate to FY20F revenue at USD 1.59 bn, drop by 5.7% from

FY19E. Meanwhile, on the bottom line level, we forecasted ITMG to

record FY20F net profit of USD 112.4 mn, down by 16% YoY,

mainly due to lower coal price assumptions. Moreover, we have

baked in lower SR at 10.0x in our model (vs 11.3x in 9M19) which

should slightly offset the decline in coal price.

Potential dividend of 14% yield. Despite potentially lower

earnings next year, ITMG should still be able to distribute 14% of

dividend yield in FY20, which should give a slight relieve to

shareholders. Note that, ITMG always pay out 100% of its earnings

to shareholders.

Valuation. Our target price of IDR 12,000 per share is derived

from DCF based valuation (14% WACC) throughout its life of mine.

ITMG is currently traded at 7.7x FY20F forward PE, -0.3SD from its

5 years average.

38

Stock Information

Bloomberg Ticker ITMG IJ

52-Week High 24,475

52-Week Low 10,050

FY20F P/E 8.5x

FY20F P/BV 1.1x





52-Week Target Price 12,000

% Change 8.6%

Highlights (USD Mn) 2018 2019E 2020F 2021F 2022F

Revenue 2,008 1,649 1,555 1,561 1,566

% growth 18.8% -17.9% -5.7% 0.4% 0.3%

Gross Profit 584 308 278 293 281

Net Profit 259 133 112 116 107

% growth 2.4% -48.5% -15.7% 3.2% -7.9%

Gross Margin (%) 29.1% 18.7% 17.9% 18.8% 17.9%

Net Margin (%) 12.9% 8.1% 7.2% 7.4% 6.8%

Return on Equity (%) 26.6% 14.6% 12.5% 12.9% 11.9%

Return on Assets (%) 17.9% 9.8% 8.3% 8.5% 7.7%

EPS (USD) 0.23 0.12 0.10 0.10 0.09

39

Income Statement Cash Flow

Balance Sheet Ratio Analysis

Coal Mining | Indo Tambangraya Megah

(USD Mn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalent 377 396 442 488 538

Trade Receivables 217 179 168 169 170

Other CA 172 157 149 149 150

Total CA 766 732 759 807 857

Fixed Assets 227 219 213 214 218

Deferred Exploration 123 121 122 122 114

Others 326 291 256 223 191

Total Assets 1,443 1,363 1,350 1,366 1,380

Trade Payables 194 183 174 173 175

Accrued Expense 146 138 131 130 132

Other CL 50 40 39 40 40

Total CL 390 361 344 343 347

Mine Rehabilitation 38 52 66 82 97

Others 45 44 43 42 42

Total Liabilities 473 456 454 467 486

Share & APIC 393 393 393 393 393

Retained Earnings 600 538 527 529 525

Other Equity (23) (23) (23) (23) (23)

Total Equity 973 910 900 901 897

Total Equity & Lia-bilities

1,443 1,363 1,350 1,366 1,380

2018 2019E 2020F 2021F 2022F

Profitability

ROE 26.6% 14.6% 12.5% 12.9% 11.9%

ROA 17.9% 9.8% 8.3% 8.5% 7.7%

Gross Margin 29.1% 18.7% 17.9% 18.8% 17.9%

Operating Margin 18.3% 11.5% 10.3% 10.6% 9.7%

EBITDA Margin 26.2% 15.9% 15.1% 15.7% 15.2%

Net Profit Margin 12.9% 8.1% 7.2% 7.4% 6.8%

Liquidity

Current Ratio 2.0 2.0 2.2 2.4 2.5

Solvency

Debt to Equity 0.5 0.5 0.5 0.5 0.5

Debt to Assets 0.3 0.3 0.3 0.3 0.4

Valuation

Price to Earning (PE) 3.9 7.1 8.5 8.2 8.9

Price to Book (PBV) 1.0 1.0 1.1 1.1 1.1

Assumptions

Coal Price ($/ton) 100.0 75.0 70.0 70.0 70.0

Coal production 22.1 23.6 23.6 24.1 24.1

Stripping Ratio 11.0 10.8 10.0 10.0 10.0

(USD Mn) 2018 2019E 2020F 2021F 2022F

Revenue 2,008 1,649 1,555 1,561 1,566

Cost of Revenue (1,424) (1,341) (1,277) (1,268) (1,285)

Gross Profit 584 308 278 293 281

Selling Expense (122) (104) (97) (99) (99)

G&A Expense (30) (30) (31) (32) (34)

Net Financing 4 5 6 7 7

Other Expense (68) 11 5 (3) (3)

EBT 367 190 161 166 153

EBITDA 526 262 234 245 238

Tax (109) (57) (48) (50) (46)

Net Profit 259 133 112 116 107

(USD Mn) 2018 2019E 2020F 2021F 2022F

Net Income 259 133 112 116 107

Dep & Amo 94 88 84 83 89

Chg. in NWC 96 24 2 (2) 3

Others (11) (0) (0) (0) (0)

CF from Operating 438 244 198 197 198

Capital Expenditure (49) (35) (36) (43) (45)

Chg. in LT Assets 9 5 4 3 2

Chg. in LT Liabilities 10 12 14 15 15

Others (158) (12) (11) (10) (10)

CF from Investing (188) (30) (30) (36) (38)

Chg. in Share & APIC - - - - -

Chg. in ST loans - - - - -

Chg. in LT loans - - - - -

Dividends Paid (243) (196) (123) (114) (111)

Others (1) 0 0 0 0

CF from Financing (244) (196) (123) (114) (111)

Beginning Cash 374 377 396 442 488

Change in Cash 6 19 46 47 49

Ending Cash 380 396 442 488 538

Coal Mining Sector

PT Adaro Energy Tbk.

NEUTRAL

We maintain our NEUTRAL rating on PT Adaro Energy Tbk.

(ADRO) with 52-week target price of IDR 1,650. Our TP

implies 8.8x FY20 PE, -0.5SD from its 5 years average. After a

strong earnings performance in FY19 boosted by Kestrel

acquisitions, we expect earnings momentum to turn negative in

FY20, mainly driven by weaker thermal and coking coal price. We

forecast ADRO’s EPS to decline by 15% as ASP fall by 6% YoY in

FY20. Given the potential decline in earnings and cloudy industry

outlook (higher China’s supply, weak demand, and high inventory

level), we expect valuation to de-rate from its historical mean.

During coal price downturn in FY14-16, ADRO was traded at around

8-10x PE, hence we see limited upside for the stock at current

time. Upside risks to our call are higher than expected coal price,

better than expected global economic data and potential corporate

action.

Weak coal price will lead to an earnings decline. We forecast

ADRO’s earnings to fall to USD 418 mn in FY20F, down by 15%

from our FY19 estimate. Weaker thermal and coking coal price will

drag down blended ASP next year, where we expect it will fall by

6% to USD 50.7 per ton in FY20F. Meanwhile, we expect production

to increase slightly to 57 Mt while keeping our stripping ratio flat at

4.4x, a similar level to FY16 when coal price bottomed.

Lower earnings contribution from Kestrel mines. As of 9M19,

Kestrel book a revenue and net profit of USD 603 mn and USD 89

mn respectively, on track to meet our FY19 estimates (~80%

achievement). However, we note that Kestrel ASP in 3Q19 dropped

to USD 107 per ton from USD 139 per ton in 2Q19. This was due to

significant drop in coking coal price benchmark from USD 200 per

ton in 1H19 to USD 170 per ton in 2H19, partly due to the muted

demand and the decline in steel prices. We expect price trend to

continue in FY20, resulting in a lower contribution from Kestrel to

ADRO (-37% YoY) despite potentially higher output.

Valuation. Our target price of IDR 1,650 is based on DCF derived

valuation (12.5% WACC and 0.5% terminal growth). ADRO is

currently trading at 8.5x FY20 forward PE, -0.6 SD from its 5 years

average.

40

Stock Information

Bloomberg Ticker ADRO IJ

52-Week High 1,715

52-Week Low 1,010

FY20F P/E 8.8x

FY20F P/BV 0.8x




Current Price 1,590


% Change 3.8%


Revenue 3,620 3,410 3,234 3,257 3,245

% growth 11.1% -5.8% -5.2% 0.7% -0.4%

EBITDA 1,240 1,107 1,053 1,042 1,007

Net Profit 418 492 419 406 385

% growth -13.6% 17.8% -14.9% -3.0% -5.2%

EBITDA Margin (%) 34.3% 32.5% 32.6% 32.0% 31.0%

Net Margin (%) 11.5% 14.4% 13.0% 12.5% 11.9%

Return on Equity (%) 9.7% 10.7% 8.7% 8.1% 7.3%

Return on Assets (%) 5.9% 6.9% 5.8% 5.4% 5.0%

EPS 0.013 0.015 0.013 0.013 0.012

41



Coal Mining | Adaro Energy

(USD Mn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalent 928 1,046 1,087 1,424 1,756


Other CA 206 184 180 179 175

Total CA 1,600 1,585 1,603 1,942 2,269

Mining Properties 2,297 2,182 2,071 1,963 1,857

Fixed Assets 1,610 1,845 2,028 2,030 2,009

Other LT Assets 1,554 1,559 1,567 1,581 1,593

Total Assets 7,061 7,171 7,269 7,515 7,728

Bank Loans 183 172 163 164 164

Other CL 634 602 568 570 567

Total CL 816 774 731 734 731

Bank Loans 1,211 1,091 1,035 1,042 1,039

Others 730 723 689 700 707

Total Liabilities 2,758 2,588 2,455 2,476 2,476

Share & APIC 1,497 1,497 1,497 1,497 1,497

Retained Earnings 2,161 2,390 2,586 2,775 2,954

NCI 652 695 732 767 800

Other Equity (8) - - - -

Total Equity 4,303 4,583 4,814 5,039 5,252


7,061 7,171 7,269 7,515 7,728

2018 2019E 2020F 2021F 2022F

Profitability

ROE 9.7% 10.7% 8.7% 8.1% 7.3%

ROA 5.9% 6.9% 5.8% 5.4% 5.0%

Gross Margin 33.4% 29.1% 28.7% 27.9% 26.7%


EBITDA Margin 34.3% 32.5% 32.6% 32.0% 31.0%


Liquidity

Current Ratio 1.1 1.4 1.5 1.9 2.4

Solvency

Debt to Equity 0.3 0.3 0.3 0.2 0.2

Debt to Assets 0.2 0.2 0.2 0.2 0.2

Valuation


Price to Book (PBV) 0.9 0.8 0.8 0.7 0.7

Assumptions

Coal Price ($/ton) 100.0 75.0 70.0 70.0 70.0

Coal production 54.0 56.8 57.5 58.4 58.9

Stripping Ratio 5.1 4.5 4.4 4.4 4.4

(USD Mn) 2018 2019E 2020F 2021F 2022F

Revenue 3,620 3,410 3,234 3,257 3,245

Cost of Revenue (2,410) (2,417) (2,307) (2,347) (2,378)

Gross Profit 1,210 993 927 910 868

Operating Expense (194) (218) (214) (221) (228)

Other (124) - - - -

EBIT 892 775 713 689 640

EBITDA 1,240 1,107 1,053 1,042 1,007

Net Financing (41) (40) (33) (33) (23)

Gain/(loss) of JV (29) 77 61 62 63

EBT 821 811 741 718 680

Tax (343) (277) (286) (276) (261)

NCI 60 43 36 35 34

Net Profit 418 492 419 406 385

(USD Mn) 2018 2019E 2020F 2021F 2022F

Net Income 418 492 419 406 385

Dep & Amo 412 391 414 432 451

Chg. in NWC 160 104 (10) 1 2



Mining properties (59) - - - -

Chg. in LT Assets (581) (5) (8) (14) (13)

Chg. in LT Liabilities (63) (8) (34) 11 7

CF from Investing (1,100) (524) (527) (328) (330)


Chg. in ST Loans (17) (13) (11) 1 (1)

Chg. in LT Loans 55 (120) (56) 7 (4)

Dividends Paid (223) (263) (224) (217) (206)

Others 17 51 36 35 34


Beginning Cash 1,207 928 1,046 1,086 1,424

Change in Cash (279) 118 41 338 332

Ending Cash 928 1,046 1,086 1,424 1,756

Coal Mining Sector

PT Bukit Asam Tbk.

NEUTRAL

We maintain our NEUTRAL rating for PT Bukit Asam Tbk.

(PTBA) with 52-week target price of IDR 2,700. Our TP

implies 8.0x FY20F PE, -0.5SD from its 5 years average. Our

neutral rating on the stock is supported by limited upside risk from

coal price (higher China’s supply, weak demand and high inventory

level) which will lead to muted earnings growth ahead. We forecast

PTBA’s EPS to decline by 4.4% in FY20 due to lower average coal

price. Given potential earnings decline and cloudy sector outlook,

we expect valuation to de-rate from its historical mean. During coal

price downturn, PTBA was traded at 6-9x PE, hence we see limited

upside for the stock at current time. Upside risks to our call are

higher than expected coal price and better than expected global

economic data.

Higher output help offset ASP decline. We forecast PTBA’s

revenue to decline by 3% YoY in FY20 to IDR 20.8 tn, as slight

increase in output (2% YoY) should help in offsetting a bit of ASP

decline (-5% YoY). Moreover, given its high exposure to domestic

sales (~60%), its ASP should be more resilient compared to other

miners who are more exposed to global coal price. Nonetheless, we

still expect PTBA earnings to decline slightly by 4.4% in FY20 to

IDR 3.9 tn due to a lower average coal price next year before

recovering in FY21 (+8% YoY) driven by stable long term output

growth. Furthermore, we also expect the company to slightly lower

their strip ratio next year to 4.5x to mitigate the impact of a lower

ASP.

Strong cash balance and high dividend payout ratio. Despite

weaker earnings outlook, we do note that PTBA currently holds a

strong balance sheet with a high cash balance (post treasury sales

of ~USD 150 mn), which should keep supporting high dividend

payout ratio for shareholders. With a similar 75% payout ratio in

FY20, it should translate to 10% of dividend yield at current price.

Valuation. Our target price of IDR 2,700 is based on DCF derived

valuation (12.9% WACC and 0.5% terminal growth). PTBA is

currently trading at 7.7x FY20 forward PE, -0.6SD from its 5 years

average. Given the weak sector outlook, we see current valuation

has been fairly valued.

42

Stock Information

Bloomberg Ticker PTBA IJ

52-Week High 4,510

52-Week Low 2,110

FY20F P/E 8.0x

FY20F P/BV 1.4x




Current Price 2,580


% Change 4.6%

Highlights (IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 21,167 21,458 20,829 21,765 22,708

% growth 8.7% 1.4% -2.9% 4.5% 4.3%

EBITDA 7,002 5,916 5,555 5,959 6,039

Net Profit 5,024 4,046 3,868 4,192 4,250

% growth 12.2% -19.5% -4.4% 8.4% 1.4%

EBITDA Margin (%) 33.1% 27.6% 26.7% 27.4% 26.6%

Net Margin (%) 24.2% 19.2% 18.9% 19.6% 19.1%

Return on Equity (%) 30.9% 19.7% 17.9% 18.4% 17.8%

Return on Assets (%) 20.8% 13.4% 12.6% 13.1% 12.5%

EPS (IDR) 436 351 336 364 369

43



Coal Mining | Bukit Asam

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalent 6,301 9,396 9,579 9,627 10,796

Trade Receivables 2,782 4,409 4,280 4,472 4,666

Other CA 2,657 2,756 2,727 2,878 3,089

Total CA 11,739 16,561 16,585 16,977 18,550

Fixed Assets 6,548 6,983 7,148 7,321 7,502

Other LT Assets 5,886 6,644 6,988 7,696 7,871

Total Assets 24,173 30,187 30,722 31,995 33,923

Trade Payables 2,322 2,937 2,483 2,696 2,890

Bank Loans 85 315 306 320 334

Other CL 2,528 2,264 2,319 2,374 2,496

Total CL 4,936 5,516 5,108 5,390 5,719

Other non current 2,968 4,079 3,981 3,842 4,297


Share & APIC 1,183 3,103 3,103 3,103 3,103

Treasury Shares (2,302) (990) (990) (990) (990)


NCI 255 333 408 489 571

Other Equity 320 320 320 320 320

Total Equity 16,270 20,592 21,634 22,763 23,908


24,173 30,187 30,722 31,995 33,923

2018 2019E 2020F 2021F 2022F

Profitability

ROE 30.9% 19.7% 17.9% 18.4% 17.8%

ROA 20.8% 13.4% 12.6% 13.1% 12.5%

Gross Margin 40.4% 35.0% 34.2% 35.4% 34.8%


EBITDA Margin 33.1% 27.6% 26.7% 27.4% 26.6%


Liquidity

Current Ratio 2.4 3.0 3.2 3.1 3.2

Solvency

Debt to Equity 0.5 0.5 0.4 0.4 0.4

Debt to Assets 0.3 0.3 0.3 0.3 0.3

Valuation


Price to Book (PBV) 1.9 1.5 1.4 1.4 1.3

Key Assumptions

Coal Price ($/ton) 100.0 75.0 70.0 70.0 70.0

Coal Production 26.4 27.3 27.9 29.4 30.7


(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 21,167 21,458 20,829 21,765 22,708

Cost of Revenue (12,621) (13,954) (13,704) (14,059) (14,815)

Gross Profit 8,546 7,504 7,125 7,706 7,894

G&A Expense (1,756) (1,720) (1,658) (1,758) (1,865)

Selling & Marketing (841) (858) (879) (927) (977)

Others 335 253 199 184 197

EBIT 6,283 5,179 4,788 5,204 5,249

EBITDA 7,002 5,916 5,555 5,959 6,039

Net Financing 223 247 366 369 399

Profit from JV 352 129 155 183 187

EBT 6,858 5,555 5,310 5,755 5,835

Tax (1,737) (1,430) (1,367) (1,482) (1,502)

NCI 97 78 75 81 82

Net Profit 5,024 4,046 3,868 4,192 4,250

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 5,024 4,046 3,868 4,192 4,250

Depreciation 504 658 688 718 748

Amortization 64 80 80 38 43

Chg. in NWC 2,616 (1,246) (237) (82) (96)

CF from Operating 8,207 3,538 4,398 4,865 4,945

Capital Expenditure (894) (1,073) (833) (871) (908)

Chg. in LT Assets (1,238) (857) (445) (766) (238)

Chg. in LT Liabilities (635) 810 (76) (172) 421

CF from Investing (2,766) (1,120) (1,354) (1,808) (725)

Chg. in Share & APIC - 1,920 - - -

Chg. in ST Loans (69) 100 (14) 21 21

Chg. in LT Loans (72) 302 (22) 33 33

Dividends Paid (2,774) (3,035) (2,901) (3,144) (3,188)

Others 220 1,390 75 81 82

CF from Financing (2,695) 677 (2,862) (3,009) (3,051)

Beginning Cash 3,555 6,301 9,396 9,579 9,627

Change in Cash 2,746 3,095 183 48 1,169

Ending Cash 6,301 9,396 9,579 9,627 10,796

Coal Mining Sector

PT Indika Energy Tbk.

BUY

We raise our call on PT Indika Energy Tbk. (INDY) from

NEUTRAL to BUY with 52-week target price of IDR 1,400,

derived from DCF based valuation (9.4% WACC). Our TP provides

21% potential upside and implies 7.4x FY20F core PE (exc. Kideco’s

amortization expense of USD 135 mn). INDY’s share price has

declined by 27% YTD and 75% from its peak in Jan-18 with its

valuation that is now depressed to 6.0x forward PE and 0.4x

forward PBV, far below its peers at 7.7x-8.5x PE and 0.7-1.4x PBV.

Though we note that industry outlook remains challenging at this

time, we see trading opportunity on the stock as valuation has

become undemanding. With an annual EBITDA at ~USD 400 mn, a

cash level of ~750 mn and USD 1.1 bn of equity, INDY’s current

market cap of USD 420 mn provides an attractive risk/reward, in

our view. Downside risks to our call are lower than expected coal

price and higher than expected cash cost.

Still expecting lower earnings due to weaker coal price. We

forecast INDY to book USD 69 mn of core profit in FY20F, down by

14% from our FY19 estimate. This was mainly driven by a lower

selling price (-2.5% YoY) paired with a flat production growth next

year (34 Mt). For Kideco, we expect the company to book a profit

of USD 102 mn in FY20 (vs USD 121 mn in FY19E). Meanwhile, we

expect earnings growth to slow down for the other businesses

(Petrosea, MBSS and Tripatra), after posting a strong recovery in

FY19. On EBITDA level, we expect the company to book FY20

EBITDA at USD 410 mn, 5% lower as compared to the previous

year.

Diversification to non-coal business. The company is targeting

to diversify its business from coal-business related. Management

mentions that they are targeting contributions from the non-coal

business to reach 25% in the next 5 years. Since 2 years ago, the

company has actively engaged in M&A activities on non-coal assets

such as adding their stakes in Nusantara Resources (gold mine

company) and building a fuel storage in East Kalimantan. We could

expect further investments in non-coal related business. The

company currently holds a cash balance of USD 750 mn (20% of

total assets) and a net debt to equity of 0.8x, which we believe is

enough to support the expansion.

44

Stock Information

Bloomberg Ticker INDY IJ

52-Week High 2,260

52-Week Low 1,050

FY20F P/E (Core) 7.4x

FY20F P/BV 0.4x




Current Price 1,160


% Change 20.7%


Revenue 2,963 2,675 2,606 2,598 2,613

% growth 169.7% -9.7% -2.6% -0.3% 0.6%

Gross Profit 641 434 387 383 386

Net Profit 80 (6) (18) (17) 3

Core Profit 168 81 69 70 90

Gross Margin (%) 21.6% 16.2% 14.8% 14.7% 14.8%

Net Margin (%) 2.7% -0.2% -0.7% -0.6% 0.1%

Return on Equity (%) 7.1% -0.5% -1.5% -1.5% 0.3%

Return on Assets (%) 2.2% -0.2% -0.5% -0.5% 0.1%

EPS (USD) 0.015 -0.001 -0.003 -0.003 0.000

45



Coal Mining | Indika Energy

(USD Mn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalent 613 499 475 469 569


Other CA 417 416 451 484 436

Total CA 1,460 1,406 1,424 1,481 1,522

Mining Properties 11 10 10 10 10

Fixed Assets 627 769 813 832 846

Other LT Assets 1,572 1,473 1,344 1,209 1,073

Total Assets 3,670 3,658 3,591 3,531 3,451

Loans Payable 84 51 50 50 50

Other CL 587 595 653 654 612

Total CL 670 645 703 704 662

Loans Payable 1,377 1,395 1,330 1,324 1,320

Others 496 444 400 360 324


Share & APIC 311 311 311 311 311


NCI 179 200 195 191 192

Others 68 68 68 68 68

Total Equity 1,127 1,173 1,158 1,143 1,146


3,670 3,658 3,591 3,531 3,451

2018 2019E 2020F 2021F 2022F

Profitability

ROE 7.1% -0.5% -1.5% -1.5% 0.3%

ROA 2.2% -0.2% -0.5% -0.5% 0.1%

Gross Margin 21.6% 16.2% 14.8% 14.7% 14.8%

EBITDA Margin 19.9% 16.1% 15.7% 16.3% 16.6%

Net Profit Margin 2.7% -0.2% -0.7% -0.6% 0.1%

Liquidity/Solvency

Current Ratio 0.5 0.5 0.5 0.5 0.4

Debt to Equity 1.6 1.5 1.2 1.2 1.2

Debt to Assets 0.5 0.5 0.4 0.4 0.4

Valuation

Core PE 3.1 6.4 7.4 7.4 5.7

Price to Book (PBV) 0.5 0.4 0.4 0.4 0.0

Assumptions

Coal price 100.0 75.0 70.0 70.0 70.0

Coal production 34.0 34.0 34.0 34.0 34.0


(USD Mn) 2018 2019E 2020F 2021F 2022F

Revenue 2,963 2,675 2,606 2,598 2,613

Cost of Revenue (2,322) (2,241) (2,220) (2,215) (2,228)

Gross Profit 641 434 387 383 386


Others (164) (146) (134) (129) (127)

EBIT 344 160 124 122 124

EBITDA 588 430 410 423 434

Net Financing (8) (19) (6) (6) (6)

Gain from JV 21 31 34 36 39

EBT 386 182 145 146 151

Tax (167) (61) (68) (69) (73)

NCI 18 21 (4) (4) 1

Net Profit 80 (6) (18) (17) 3

Core Profit 168 81 69 70 90

(USD Mn) 2018 2019E 2020F 2021F 2022F

Net Income 80 (6) (18) (17) 3

Dep. & Amo. 223 239 253 265 271

Chg. in NWC 75 53 (16) 60 (15)


Capital Expenditure 102 241 156 143 144

Chg. in Intangible 3 - - - -


Chg. in LT Liabilities (61) (52) (44) (41) (36)



Chg. in ST Loans (29) (33) (1) (0) 0

Chg. in LT Loans 72 19 (65) (6) (4)

Dividends Paid 32 (2) (7) (7) 1

Chg. in Others (8) 21 (4) (4) 1

CF from Financing 3 10 (64) (3) (5)

Beginning Cash 622 641 499 475 469

Change in Cash 19 (142) (24) (5) 99

Ending Cash 641 499 475 469 569

Coal Mining Sector

PT United Tractors Tbk.

BUY

We upgrade our recommendation on PT United Tractors Tbk

(UNTR) from NEUTRAL to BUY with 52 week target price of

IDR 25,700. Our TP provides 21% upside and implies 8.4x FY20F

PE (-1SD from 5-years average). Recent price correction provides a

good opportunity to collect the stock, in our view, given UNTR

share price has declined by 22% YTD with its valuation de-rate to

its all time low (6.9x FY20 forward PE, -2SD). Despite the weak

industry outlook from the coal business, we believe earnings should

remain resilient (+4% CAGR FY19E-FY21F) supported by the gold

segments (Martabe) and improvements in ACST. In addition, the

stock now provides 5.8% dividend yield at current price. Downside

risks to our call are lower than expected coal price and lower than

expected operational numbers.

Resilient earnings. Despite weakening industry, we still expect

UNTR to book a slight positive earnings growth in FY20 (+3% YoY)

supported by the non-coal business segments (Martabe and ACST).

We expect Martabe to post 25% earnings growth in FY20 due to a

higher ASP (Gold assumption at USD 1,500), expired hedge

position, and better cost control from operational efficiency.

Meanwhile, we expect ACST earnings to turn positive in FY20 after

booking a loss in the previous year. On the coal business segments,

we forecast Komatsu heavy equipment sales to drop to 3k units

from 3.2k units in FY19E, PAMA’s SR to fall to 7.5x with flat OB

growth output, and slight increase in coal output (2% YoY).

Update on management key takeaways. During the company’s

latest analyst meeting, management highlighted their view on FY20

outlook. Management expects capex to decline in FY20, as

equipment replacement has been done in FY19. On the other hand,

the company will continue to observe potential opportunities in the

non-coal business as they are targeting higher contributions from

the non-coal segments in years ahead.

Valuation. Our target price of IDR 25,700 per share is derived

from DCF based valuation (13% WACC and 1% terminal growth).

UNTR is currently trading at 6.9x FY20 forward PE, -2SD from its

five years average PE. We see attractive risk/reward on the stock

at current point.

46

Stock Information

Bloomberg Ticker UNTR IJ

52-Week High 29,525

52-Week Low 19,650

FY20F P/E 8.4x

FY20F P/BV 1.4x






% Change 21.4%


Revenue 84,625 87,366 87,058 89,756 92,318

% growth 31.1% 3.2% -0.4% 3.1% 2.9%

Gross Profit 21,110 21,683 22,084 22,985 23,906

EBITDA 20,700 22,005 23,074 24,585 26,145

% growth 50.9% 6.3% 4.9% 6.5% 6.3%

Pre-Tax Profit 15,709 15,491 16,075 16,832 17,508

Net Profit 11,126 11,010 11,425 11,963 12,444

% growth 50.3% -1.0% 3.8% 4.7% 4.0%

Return on Asset 11.6% 9.4% 9.1% 9.0% 8.7%

Return on Equity 22.0% 18.7% 17.4% 16.4% 15.5%

47



Coal Mining | United Tractors

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalents 13,438 21,281 25,324 29,485 32,203


Inventories 13,618 14,083 13,931 14,316 14,668

Fixed Assets 24,585 25,551 27,437 29,646 31,810

Mining Properties 15,889 15,612 15,533 15,253 14,974

Total Assets 116,281 125,057 132,632 142,530 152,432

Trade Payables 32,691 33,807 33,442 34,367 35,212

Accruals 3,763 3,951 4,149 4,356 4,574

ST Bank Loans 6,857 3,428 3,428 3,428 3,428

Current LT Loans 164 607 1,047 1,904 2,407

LT Loans 3,286 6,571 6,571 6,571 6,571


Total Equity 57,051 63,921 71,216 78,914 86,886

2018 2019E 2020F 2021F 2022F

Profitability

ROE 11.6 9.4 9.1 9.0 8.7

ROA 22.0 18.7 17.4 16.4 15.5

Gross Margin 24.9 24.8 25.4 25.6 25.9

Operating Margin 19.0 19.2 19.7 19.9 20.1

EBITDA Margin 24.5 25.2 26.5 27.4 28.3

Net Profit Margin 13.6 13.0 13.5 13.7 13.9

Liquidity

Current Ratio 1.1 1.4 1.5 1.5 1.5

Solvency

Debt to Equity 0.2 0.2 0.2 0.2 0.1

Debt to Assets 0.1 0.1 0.1 0.1 0.1

Valuation


Price to Book (PBV) 1.8 1.6 1.4 1.3 1.2

Assumptions

USD/IDR 14,247 14,300 14,300 14,300 14,300

Komatsu Sales (unit) 4,879 3,200 3,000 3,000 3,000

PAMA OB (Mn ton) 979 1,026 1,025 1,055 1,087

PAMA Coal Production (Mn ton)

125.2 133.2 136.7 140.8 145.0

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Revenue 84,625 87,366 87,058 89,756 92,318

- Heavy Equipment 29,615 23,853 23,038 23,662 24,335

- Mining Contracting 40,559 40,160 40,120 41,324 42,564

- Coal Mining 10,727 11,083 10,603 10,868 11,139

- Construction 3,724 3,997 4,092 4,166 4,224

- Gold Mining - 8,273 9,204 9,736 10,057

Cost of Revenue 63,515 65,683 64,974 66,771 68,412

Gross Profit 21,110 21,683 22,084 22,985 23,906

Selling Expenses 968 826 813 835 859

G&A Expenses 3,371 4,242 4,289 4,481 4,686

Impairment - - - - -

Other Expense 977 158 156 160 165

Other Income 282 316 311 320 329

Operating Profit 16,075 16,774 17,138 17,828 18,526

EBITDA 20,700 22,005 23,074 24,585 26,145

Finance Income 764 493 781 929 1,082

Finance Cost 1,438 2,267 2,334 2,430 2,619

Profit from JV 307 491 490 505 519

Income Before Tax Expenses

15,709 15,491 16,075 16,832 17,508

Net Income 11,126 11,010 11,425 11,963 12,444

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 11,126 11,010 11,425 11,963 12,444

Dep. & Amo. 4,625 5,231 5,936 6,757 7,619

Chg. in NWC 3,462 (285) 17 321 150

Others 1,965 460 405 441 457


Capital Expenditure (12,835) (6,198) (7,822) (8,965) (9,783)

Chg. in LT Assets (21,360) 2,010 (1,689) (2,445) (3,798)

Chg. in LT Liabilities 3,574 (88) (133) (61) 55

CF from Investing (30,620) (4,275) (9,644) (11,472) (13,526)


Chg. in ST Loans 5,105 (2,985) 440 857 503

Chg. in LT Loans 523 3,286 - - -

Dividends Paid (3,578) (4,599) (4,536) (4,707) (4,928)

Others - - - - -

CF from Financing 2,050 (4,299) (4,096) (3,850) (4,425)

Beginning Cash 20,831 13,438 21,281 25,324 29,485

Change in Cash (7,393) 7,843 4,043 4,161 2,719

Ending Cash 13,438 21,281 25,324 29,485 32,203

Construction Sector New Normal

OVERWEIGHT

Capital city relocation to bolster growth from 2021 onwards. The new capital city will be located at North Penajam Paser Regency, in East Kalimantan. Project tender is slated to commence in end of 2020, while construction will start in 2021, with the first phase expected to be completed in 2024. The budget is IDR466tn, 2%/34%/64% for land acquisition/infrastructure/building development. While funding source is estimated to originate from state budget (19%, 89.5tn), public private partnerships (54%), and private (26%). Examining other capital city relocation projects, it costs USD8bn - USD22bn and takes 5-25 years to complete. We are of the view that this will support order book growth in 2021 onwards. We forecast aggregate SOE contractors new contract to grow 19% in FY20F, and will grow from FY19E-FY22F with a 3 year CAGR of 12.9%

The past, present, and future. A lot has happened in the sector in the past infrastructure boom during President Joko Widodo’s first Presidential term in 2014-2019, during which the sector journeyed through its peak and trough reaching P/E multiples ranging from 5.6x - 36x, FY14-FY19E earnings CAGR of 24.1% and new contract CAGR of 15.9%. Meanwhile, in the present the ride has not been as smooth sailing as FY19E NPATMI is forecast to drop 12.7% YoY, new order to remain flat after declining 16.6% in FY18, with the sector currently trading at 10.2x P/E, amidst the election year which contributed to certain project tender delays. This begs the question, what does the future hold? Going forward, we are OVERWEIGHT on the sector as we expect recovery from FY19E’s low base achievement while there are both headwinds and tailwinds coming from numerous factors that we will address in the following. Infrastructure spending set to rise. According to Bappenas’ National Medium-Term Development Plan (RPJMN), infrastructure allocation in 2020-2024 amounts to IDR6,421tn (+34.6% versus 2015-2019). However, govt’s allocated 2020 infrastructure spending in the proposed national budget came in at IDR419tn (+4.9% YoY, 16.5% of national budget), while the total 2020 state budget of IDR2,540tn (+8.5% YoY) is focused more towards human capital through education spending (IDR508tn, +6.2% YoY), and healthcare (IDR132tn, +13% YoY). This is in-line with SOE contractors’ view that future infra growth will need greater participation from private segment and SOEs’.

48

Source: Ministry of Finance, Sinarmas Investment Research

Government infrastructure spending

419

33%

-1%

66%

5%

41%

4% 1%5%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

0

50

100

150

200

250

300

350

400

450

2013 2014 2015 2016 2017 2018 2019E 2020F

Government infra spending (LHS) Growth (RHS)

(IDR tn)

Construction | Sector Outlook

over to the buyer. Thus, historical income from high-rise presales that were already recorded will have to be impaired from retained earnings until hand over of those properties. The net impact from both these standards will reduce contractors’ retained earnings under our coverage by IDR220bn - IDR3tn based on our channel checks. As a rule of thumb, most contractors are impairing ~1% - 2% of their accounts receivable for PSAK 71. While for PSAK 72, the most impacted are PTPP and ADHI (IDR1.8tn and IDR900bn respectively). We upgrade our stance on the sector to OVERWEIGHT and prefer selective picking on the back of higher quality earnings from new accounting regulations paired with earnings recovery post FY19E. Major overhangs namely new accounting standards and government’s future stance on the sector has mainly been cleared and the sector is on track to recover after two slow years. Growth opportunities are plenty, the question is whether contractors’ have the capacity to take them on. Weighted SOE contractors’ P/E currently stands at 10.2x, roughly –1 SD of its 5 years average. Our pecking order is as follows: WIKA > WEGE > WTON > PTPP > ADHI > WSKT > WSBP. We prefer companies that have a healthier cash flow and balance sheet capacity to seize new orders. If all is well, we believe a new normal is going to be formed with valuations rationalizing to 10x-12x P/E multiple in the long run.

Leverage will still expand with more investments, but CoF set to improve. As new projects are increasingly funded by the contractors’ themselves through minority investments, we predict that gearing ratio will peak at 1.7x in FY21F, coinciding with the capital city relocation, before slowly improving thereafter. On the positive side, since Bank Indonesia cut rates by 100 bps in 2019, contractors have managed to decrease CoF from new loans by up to 50 bps. This is impactful as interest expense is 3% - 6% of revenue. In the long run, these investments will be divested as part of contractors’ asset recycling program to free up cash for future investments and deleveraging. Previous and upcoming successful divestments include WIKA’s Surabaya - Mojokerto toll road at 2.4x P/BV, Waskita Toll Road’s (WTR) JSN and JKNN at 1.5x P/BV, ASII’s Cikampek - Palimanan toll at 3.2x P/BV, and JSMR’s TMJ stake sale at 3.0x P/BV.

New accounting standards (PSAK 71-72) to improve contractor’s receivable quality and cash flow. PSAK 71 relates to provision of receivables whereby contractors will need to impair receivables based on their age and expected future losses. While PSAK 72 impacts the property business of SOE contractors. It states that revenue recognition of high-rise presales is allowed once the property is handed

49


WIKA BUY 2,050 2,510 22.4% 10.4x

PTPP BUY 1,650 1,900 15.2% 10.2x

WSKT NEUTRAL 1,445 1,570 8.7% 19.9x

ADHI BUY 1,225 1,550 26.5% 8.0x

WEGE BUY 296 480 62.2% 8.8x

WTON BUY 440 570 29.5% 8.8x

WSBP NEUTRAL 324 350 8.0% 9.8x

Construction Sector

Source: Company Data, Sinarmas Investment Research

SOE contractors debt to equity ratio


SOE contractors new contract


SOE contractors P/E band

-5

0

5

10

15

20

25

30

35

40

Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Nov-17 Jun-18 Jan-19 Aug-19

PE -2 SD -1 SD Average +1 SD +2 SD

0.8

1.0

0.7

0.9

1.2

1.41.5

1.71.6

1.4

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0

20

40

60

80

100

120

140

2013 2014 2015 2016 2017 2018 2019E 2020F 2021F 2022F

Debt Equity DER

(IDR tn)

15%

42%

70%

4%

-17%

-3%

19%10%

10%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

50

100

150

200

250

2014 2015 2016 2017 2018 2019E 2020F 2021F 2022F

WIKA PTPP ADHI WSKT YoY

(IDR tn)(IDR tn)

Construction Sector

PT Wijaya Karya Tbk.

BUY

Steady order book expansion. WIKA booked IDR32tn new contracts in 11M19 (63%/52% of ours/company’s target). If FY19E contract target is a miss, it should translate to greater NC booking in FY20F as it means some of the project booking will be shifted. We bake in 0.1%/12.5%/10% YoY growth for NC in FY19E/FY20F/FY21F with transportation projects being the growth driver for FY20F, i.e. MRT phase 2 and LRT phase 2 totaling up to IDR10tn, as well as toll roads. As order book remains massive at IDR144tn in FY19E (+16.4% YoY), we calculate WIKA’s earnings will rise by 19.3%/5.1%/19.0% in FY19E/FY20F/FY21F. Note that core NPATMI in FY20F represents a 20.8% YoY growth as FY19E NPATMI includes IDR351bn gain on divestment of Surabaya - Mojokerto toll road. New accounting regulations will improve balance sheet quality. We bake in IDR2tn of impairment for PSAK 71 and 72 compliance, in-line with management guidance and implies ~10% dilution of FY19E BV. We are of the view that the new regulations provide contractors an opportunity to kitchen sink and clean their balance sheet, which will provide a clearer and smoother cash flow picture from thereafter. In the long run, we estimate 2% receivable impairment with 30% recovery rate for the time being till further color can be provided by management. Heading into the year end with positive OCF. As turnkey payment for Balikpapan - Samarinda toll road worth IDR5tn will be received in end of 2019, company expects to book positive OCF in FY19E similar to FY18 amount, which was IDR2.7tn. WIKA targets to sustain gearing at 1.1x versus 9M19 level of 1.2x due to existing turnkey projects, namely Kunciran - Cengkareng toll road worth IDR2.5tn and Sumatra Padang - Pekanbaru worth IDR8.7tn. We pick PT Wijaya Karya Tbk. (WIKA) as our top pick in the sector with a BUY rating and a slightly lower end-of-FY20 target price of IDR2,510. Our TP represents 10.4x PE, -1 SD from its 5 years average PE. We like WIKA due to their consistent outperformance in the sector, diverse construction capabilities, and order book growth. Downside risks to our call are: 1) Excessive gearing ramp up, 2) rail projects cancellation or lost tender, and 3) missed payments.

50

Stock Information

Bloomberg Ticker WIKA IJ

52-Week High 2,500

52-Week Low 1,635

FY20F P/E 10.4x

FY20F P/BV 1.4x




Current Price 2,050


% Change 22.4%


Revenue 31,158 30,443 37,773 44,547 50,533

% growth 19.0% -2.3% 24.1% 17.9% 13.4%

Gross Profit 3,605 3,630 4,377 5,191 5,918

Net Profit 1,730 2,064 2,168 2,580 2,999

% growth 43.9% 19.3% 5.1% 19.0% 16.2%

Gross Margin (%) 11.6% 11.9% 11.6% 11.7% 11.7%

Net Margin (%) 5.6% 6.8% 5.7% 5.8% 5.9%

Return on Equity (%) 12.6% 13.2% 13.1% 14.7% 15.1%

Return on Assets (%) 3.3% 3.5% 3.4% 3.5% 3.6%

EPS (IDR) 193 230 242 288 335

51



Construction | Wijaya Karya

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & equivalents 13,974 10,537 11,840 12,327 12,994

Receivables 5,351 5,577 5,023 6,138 7,066

Other CA 24,231 22,703 27,796 32,686 37,106

Total CA 43,555 38,817 44,659 51,151 57,165

Fixed assets 4,676 9,164 10,378 11,745 13,256

Intangible Assets 714 714 714 714 714

Other LT Assets 10,284 11,399 13,111 14,570 16,631

Total Assets 59,230 60,095 68,863 78,181 87,767

Payables 13,183 9,917 12,352 14,557 16,501

ST loans 4,497 5,568 13,458 14,628 16,228

Other CL 10,572 10,320 12,724 14,906 16,842

Total CL 28,252 25,804 38,534 44,090 49,572

LT loans 9,092 10,989 5,876 6,147 6,414

Other 4,671 3,932 4,821 5,617 6,324


Share & APIC 7,453 7,453 7,453 7,453 7,453


Others & NCI 4,293 4,686 5,099 5,590 6,162

Total Equity 14,804 16,565 16,415 18,617 21,177

Total Liabilities & Equity 59,230 60,095 68,863 78,181 87,767

2018 2019E 2020F 2021F 2022F

Profitability

ROE 12.6% 13.2% 13.1% 14.7% 15.1%

ROA 3.3% 3.5% 3.4% 3.5% 3.6%

Gross Margin 11.6% 11.9% 11.6% 11.7% 11.7%



Liquidity & Solvency

Current Ratio 1.5 1.5 1.2 1.2 1.2

Debt to Equity 0.8 0.9 1.0 0.9 0.9

Debt to Assets 0.2 0.3 0.3 0.3 0.3

Int. Coverage Ratio 3.3 3.9 4.0 4.2 4.4

Valuation

Price to Earnings (P/E) 13.0 10.9 10.4 8.7 7.5

Price to Book (P/BV) 1.5 1.4 1.4 1.2 1.1

Key Assumptions (IDR Bn)

Order Book 123,513 143,769 169,283 191,832 214,353

New Contract 50,560 50,629 56,958 62,654 68,919

Burn Rate 27.1% 24.6% 25.2% 25.5% 25.5%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 31,158 30,443 37,773 44,547 50,533

% growth 19.0% -2.3% 24.1% 17.9% 13.4%

Cost of Revenue (27,553) (26,813) (33,396) (39,357) (44,615)

Gross Profit 3,605 3,630 4,377 5,191 5,918

% growth 25.3% 0.7% 20.6% 18.6% 14.0%

Operating Expense (786) (818) (918) (1,019) (1,117)

Others 615 1,665 1,392 1,533 1,721

EBIT 3,434 4,477 4,850 5,705 6,522

% growth 35.9% 30.4% 8.3% 17.6% 14.3%

EBITDA 3,242 4,877 5,329 6,256 7,154

% growth 5.5% 50.4% 9.3% 17.4% 14.4%

Net Financing (349) (868) (977) (1,105) (1,210)

EBT 3,086 3,609 3,874 4,600 5,312

Tax (1,012) (1,152) (1,293) (1,528) (1,741)

NCI 343 393 413 492 571

Net Profit 1,730 2,064 2,168 2,580 2,999

% growth 43.9% 19.3% 5.1% 19.0% 16.2%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 1,730 2,064 2,168 2,580 2,999

Depreciation (192) 400 479 551 632

Chg. in NWC 1,151 2,217 (300) 1,618 1,466

CF from Operating 388 246 2,947 1,514 2,165

Capital Expenditure (552) (4,888) (1,693) (1,918) (2,144)

Chg. in LT Assets (4,727) (1,115) (1,712) (1,459) (2,062)

Chg in LT Liabilities 1,608 (739) 889 796 707



Chg. in ST Loans (2,410) 1,071 7,890 1,170 1,600

Chg. in LT Loans 6,984 1,897 (5,114) 272 267

Dividends Paid 254 302 2,318 378 439

Others 1,107 393 413 492 571

CF from Financing 5,427 3,059 872 1,555 1,999

Beginning Cash 11,254 13,974 10,537 11,840 12,327

Change in Cash 2,720 (3,437) 1,303 488 667

Ending Cash 13,974 10,537 11,840 12,327 12,994

Construction Sector

PT Pembangunan Perumahan Tbk.

BUY

Full recovery eyed in FY21F. PTPP successfully secured IDR27.8tn of new orders as of 11M19 (67%/60% of ours/company’s estimate). This came in better than its peers, although the possibility of falling short still lingers. We expect performance to pick up starting from FY20F with full recovery in FY21F. Our new contract forecast remains conservative and indicates -4.9%/7.5%/10% YoY change in FY19E/FY20F/FY21F. The NC outlook paired with PSAK 71 and 72 impact results in EPS forecast cut of 26.1%/32.8%/32.8% respectively, and -29.4%/9.3%/16.6% YoY change. Eyeing positive OCF in FY19E and divesting assets in FY20F. Management stays confident that FY19E OCF will be +ve with IDR7.2tn of payments to be received in December. For FY20F - FY21F, minimal turnkey exposure and PTPP’s prudent receivables management should result in +ve OCF. Aside from managing its cash flow cautiously, PTPP also aims to divest assets in FY20F in minority investments such as Pandaan - Malang toll road and Medan - Kualanamu - Tebingtinggi toll road to name a few, which we have not included in our model due to divestment uncertainty. Temporary slowdown amidst new accounting regulations. We bake in IDR3tn of retained earnings reduction (17% of FY19E equity) for PSAK 71 and 72 implementation, which is in-line with management’s plan. It comprises of IDR1.2tn for receivable impairment and IDR1.8tn for property net profit reversal. To reduce the impact of PSAK 72 towards earnings volatility, company will shift focus towards landed housing business. As a result, we expect property revenue to drop 50% in FY19E before picking up again by 14%/40% in FY20F/FY21F. As property segment has higher margin, GPM will drop accordingly before picking up in FY21F. We maintain our BUY stance on PT Pembangunan Perumahan Tbk. with a lower end-of-FY20 target price of IDR1,900. Our TP implies 10.2x FY20F P/E, -1 SD from 7 years average, and 1.1x P/BV. Despite the slowdown in the near-term, we like PTPP for their steady order book expansion, reasonable leverage level, and positive OCF. Downside risks to our call stems from: 1) burn rate deceleration, and 2) contract booking delays

52

Stock Information

Bloomberg Ticker PTPP IJ

52-Week High 2,550

52-Week Low 1,340

FY20F P/E 10.2x

FY20F P/BV 1.1x




Current Price 1,650


% Change 15.2%


Revenue 25,120 26,535 30,200 35,250 40,256

% growth 16.8% 5.6% 13.8% 16.7% 14.2%

Gross Profit 3,546 3,466 3,978 4,803 5,521

Net Profit 1,502 1,060 1,159 1,351 1,651

% growth 3.4% -29.4% 9.3% 16.6% 22.2%

Gross Margin (%) 14.1% 13.1% 13.2% 13.6% 13.7%

Net Margin (%) 6.0% 4.0% 3.8% 3.8% 4.1%

Return on Equity (%) 11.8% 7.8% 10.4% 11.0% 12.2%

Return on Assets (%) 2.9% 1.9% 1.9% 2.0% 2.2%

EPS (IDR) 242 171 187 218 266

53

Construction | Pembangunan Perumahan

(IDR Bn) 2018 2019E 2020F 2021F 2022F


Receivables 22,145 23,118 23,376 25,490 26,998

Other CA 6,742 6,729 7,266 8,048 8,775

Total CA 37,534 38,304 34,280 38,095 41,618

Fixed assets 6,605 10,210 17,378 20,158 23,123

Intangible Assets 353 353 353 353 353

Other LT Assets 8,056 8,243 8,564 9,130 9,699

Total Assets 52,549 57,110 60,575 67,736 74,793

Payables 19,571 19,593 22,271 25,859 29,501

ST loans 4,014 4,761 6,621 7,987 8,364

Other CL 2,003 1,730 1,939 2,255 2,637

Total CL 26,523 27,348 32,268 37,768 42,406

LT loans 8,217 10,223 10,655 10,486 10,583

Other 513 673 765 888 1,013


Share & APIC 5,330 5,330 5,330 5,330 5,330


Others & NCI 5,711 6,065 6,451 6,901 7,451

Total Equity 16,316 17,517 15,440 16,971 18,842


2018 2019E 2020F 2021F 2022F

Profitability

ROE 11.8% 7.8% 10.4% 11.0% 12.2%

ROA 2.9% 1.9% 1.9% 2.0% 2.2%

Gross Margin 14.1% 13.1% 13.2% 13.6% 13.7%



Liquidity

Current Ratio 1.4 1.4 1.1 1.0 1.0

Debt to Equity 0.7 0.8 1.1 1.1 1.0

Debt to Assets 0.2 0.3 0.3 0.3 0.3


Valuation

Price to Earning (P/E) 7.8 11.1 10.2 8.7 7.1

Price to Book (P/BV) 0.9 0.9 1.1 1.0 0.9


Order Book 96,065 108,750 126,108 144,207 162,633

New Contract 43,490 41,355 44,457 48,902 53,793

Burn Rate 29.6% 28.3% 27.0% 27.0% 27.0%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 25,120 26,535 30,200 35,250 40,256

% growth 16.8% 5.6% 13.8% 16.7% 14.2%

Cost of Revenue (21,574) (23,070) (26,222) (30,446) (34,735)

Gross Profit 3,546 3,466 3,978 4,803 5,521

% growth 9.1% -2.3% 14.8% 20.7% 14.9%

Operating Expenses 2,628 2,499 2,917 3,630 4,230

Others 184 (480) (710) (1,056) (1,086)

EBIT 2,958 2,362 2,777 3,318 3,814

% growth 11.6% -20.2% 17.6% 19.5% 15.0%

EBITDA 3,383 2,893 3,611 4,450 5,152

% growth -1.0% -14.5% 24.8% 23.2% 15.8%

Net Financing (145) (343) (569) (744) (670)

EBT 2,813 2,019 2,207 2,573 3,144

Tax (854) (606) (662) (772) (943)

NCI 457 353 386 450 550

Net Profit 1,502 1,060 1,159 1,351 1,651

% growth 3.4% -29.4% 9.3% 16.6% 22.2%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 1,502 1,060 1,159 1,351 1,651

Depreciation 425 531 834 1,132 1,338

Chg. in NWC 3,040 882 (2,265) (1,238) (2,025)

CF from Operating (1,113) 709 4,258 3,722 5,013

Capital Expenditure 1,276 4,136 8,002 3,912 4,303

Chg. in LT Assets 2,288 186 321 566 569

Chg in LT Liabilities 111 305 234 339 445



Chg. in ST Loans 500 747 1,860 1,365 378

Chg. in LT Loans 2,759 2,230 389 (210) 104

Dividends Paid 291 212 3,622 270 330

Others 861 353 386 450 550

CF from Financing 3,830 3,118 (987) 1,336 702

Beginning Cash 9,383 8,647 8,457 3,639 4,557

Change in Cash (736) (190) (4,818) 918 1,287

Ending Cash 8,647 8,457 3,639 4,557 5,845



Construction Sector

PT Waskita Karya Tbk.

NEUTRAL

Order book and core earnings bottoming. WSKT’s mid Nov19 new contract (NC) stood at ~IDR20tn (59%/50% of our/company’s lowered NC target). Despite the potential miss, order book will remain large at IDR101tn (+7.3% YoY) in FY19E. The two drags of NC acquirement are the election year and stretched balance sheet capacity that limits investment and leverage. 2019 should be the bottom as WSKT will receive the below mentioned payments and recycle assets, improving balance sheet capacity to invest in projects. We lower our NC forecast to +24.9%/+16.5%/+10% YoY in FY19E/FY20F/FY21F, which translates to core earnings estimate changes of -47.5%/-67.3%/-59.5% respectively. Note that we are only forecasting core earnings excluding divestment from FY20F onwards as divestment gains are tentative on valuation and timeline. Divestment pipeline and massive cash payment due. The final signing for Solo - Ngawi (JSN) dan Ngawi - Kertosono (JNKK) toll concession sale was completed in Dec19. The assets are valued at 1.5x P/BV (9M19 BV was IDR1,638bn), implying IDR2.5tn payment and IDR819bn gain. Company plans to divest an additional 4 toll roads in 2020 at a minimum 1.5x P/BV. Any future successful divestment is an upside risk to our earnings estimate. On the other hand, WSKT expects to receive IDR26tn of turnkey payments and IDR14tn - IDR18tn of normal payment by 2019 year end. These cash inflow will enable company to reduce leverage to 2.3x in FY19E versus 2.8x in 9M19, while management guides lower gearing ratio at 2.1x in FY20F. We downgrade PT Waskita Karya Tbk. (WSKT) to NEUTRAL with a lower end-of-FY20 target price of IDR1,570. Our TP implies 1.1x P/BV, -1SD of its 5 year average, and 19.9x core P/E. The reasoning behind our valuation is WSKT’s weak core earnings in the short-term. While future successful asset divestments provides an upside risk, there is always the possibility of fall through. Management has not shared color on PSAK 71 and 72 impairment, however, we estimate WSKT will need to impair IDR400bn - IDR600bn, roughly 6% of accounts receivable and gross amount due from customer, similar to its peers. Downside risks are: 1) divestment failure and 2) payment delays.

54

Stock Information

Bloomberg Ticker WSKT IJ

52-Week High 2,230

52-Week Low 1,215

FY20F P/E 19.9x

FY20F P/BV 1.1x




Current Price 1,445


% Change 8.7%


Revenue 48,789 34,462 40,692 44,323 48,625

% growth 7.9% -29.4% 18.1% 8.9% 9.7%

Gross Profit 8,863 6,484 7,730 8,579 9,590

Net Profit 3,963 2,082 1,073 1,373 1,743

% growth 2.1% -47.5% -48.5% 27.9% 26.9%

Gross Margin (%) 18.2% 18.8% 19.0% 19.4% 19.7%

Net Margin (%) 8.1% 6.0% 2.6% 3.1% 3.6%

Return on Equity (%) 22.0% 10.6% 5.4% 6.5% 7.7%

Return on Assets (%) 3.2% 1.6% 0.8% 1.0% 1.2%

EPS (IDR) 292 153 79 101 128

55

Construction | Waskita Karya

2018 2019E 2020F 2021F 2022F

Profitability

ROE 22.0% 10.6% 5.4% 6.5% 7.7%

ROA 2.6% 2.6% 2.6% 2.6% 2.6%

Gross Margin 18.2% 18.8% 19.0% 19.4% 19.7%



Liquidity

Current Ratio 1.2 0.8 0.7 0.7 0.6

Debt to Equity 2.2 2.3 2.3 2.3 2.1

Debt to Assets 0.5 0.6 0.6 0.6 0.5


Valuation


Price to Book (P/BV) 1.2 1.1 1.1 1.0 0.9


Order Book 94,576 101,483 106,846 111,418 117,545

New Contract 27,216 34,000 39,600 43,560 47,916

Burn Rate 44.6% 34.0% 38.0% 40.0% 42.0%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 48,789 34,462 40,692 44,323 48,625

% growth 7.9% -29.4% 18.1% 8.9% 9.7%

Cost of Revenue (39,926) (27,978) (32,962) (35,744) (39,035)

Gross Profit 8,863 6,484 7,730 8,579 9,590

% growth -6.3% -26.8% 19.2% 11.0% 11.8%

Operating Expenses (1,668) (1,302) (1,500) (1,630) (1,881)

Others 1,642 1,081 (93) 73 29

EBIT 8,837 6,264 6,137 7,022 7,737

% growth 15.5% -29.1% -2.0% 14.4% 10.2%

EBITDA 9,864 7,091 7,035 7,983 8,764

% growth 14.5% -28.1% -0.8% 13.5% 9.8%

Net Financing (1,811) (2,474) (3,419) (3,803) (3,906)

EBT 7,026 3,790 2,718 3,219 3,831

Tax (2,406) (1,413) (1,493) (1,652) (1,842)

NCI 657 295 152 194 247

Net Profit 3,963 2,082 1,073 1,373 1,743

% growth 105.3% -55.1% -48.5% 27.9% 26.9%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 3,963 2,082 1,073 1,373 1,743

Depreciation 631 827 899 961 1,027

Chg. in NWC 9,394 (4,189) (5,703) 962 (7,154)

CF from Operating (4,800) 7,099 7,675 1,372 9,924

Capital Expenditure 9,280 16,874 9,443 7,659 8,080

Chg. in LT Assets 3,284 (24) 17 2 9

Chg in LT Liabilities 682 (2,797) 70 201 473


Chg. in Share & APIC 85 - - - -

Chg. in ST Loans 4,079 18,723 1,398 2,057 (3,120)

Chg. in LT Loans 15,191 (8,753) (214) 2,300 247

Dividends Paid 297 416 715 275 349

Others 2,381 860 (60) 785 746

CF from Financing 21,439 10,414 411 4,868 (2,475)

Beginning Cash 6,089 10,846 8,711 7,407 6,187

Change in Cash 4,757 (2,135) (1,304) (1,220) (167)

Ending Cash 10,846 8,711 7,407 6,187 6,020



(IDR Bn) 2018 2019E 2020F 2021F 2022F


Receivables 46,880 38,417 35,236 36,496 33,971

Other CA 9,263 7,398 8,735 9,515 7,688

Total CA 66,989 54,527 51,378 52,198 47,678

Fixed assets 7,091 7,704 7,767 7,585 7,381

Intangible Assets 42,229 57,663 66,145 73,024 80,281

Other LT Assets 8,082 8,058 8,075 8,077 8,086

Total Assets 124,392 127,952 133,365 140,884 143,427

Payables 23,411 18,979 23,297 24,301 26,557

ST loans 28,376 47,099 48,497 50,554 47,434

Other CL 2,202 3,306 2,846 2,921 3,466

Total CL 56,800 69,384 74,641 77,776 77,457

LT loans 32,902 24,148 23,935 26,234 26,482

Other 3,578 3,006 3,077 3,278 3,751


Share & APIC 6,909 6,909 6,909 6,909 6,909


Others & NCI 11,630 12,491 12,431 13,216 13,963

Total Equity 28,887 31,413 31,712 33,596 35,736


Construction Sector

PT Adhi Karya Tbk.

BUY

Recovery impending post FY19E lackluster achievement. ADHI managed to book IDR9.1tn new contracts in 11M19 (58%/35% of ours/company’s lowered estimates), which are dominated by construction projects. The reason for the missed achievement was several delayed and lost project tenders including Jogja - Solo toll road worth ~IDR8tn postponed to 2020 and others. On the bright side, we forecast ADHI will secure IDR27.3tn (+75% YoY) new contracts in FY20F (78% of company guidance), which is attainable as Jogja - Solo toll road itself is roughly 29% of FY20F target and LRT phase 2 will be tendered in 2H20 with a total contract size of around IDR23tn. While for the medium term, we estimate new contracts to grow at 28.4% FY19E - FY22F CAGR. We cut FY19E/FY20F NPATMI forecast by 7.5%/29% and our new numbers signify a YoY growth of 6.1%/21.4%. PSAK 71 and 72 to reduce equity by IDR1.1tn. ADHI will be impairing ~IDR200bn (1.1% of 9M19 trade receivables and gross amount due from customers) for PSAK 71 and another ~IDR900bn to comply with PSAK 72 from property segment net profit reversal. We forecast property revenue to drop 62% YoY in FY20F (4.3% of revenue in FY20F) prior to rebounding to 10% of revenue by FY20F - FY21F. Note that 9M19 property revenue is 11.6% of total revenue. Due to PSAK 71 regulation being new, management is not yet able to provide color on recovery rate and the new normal for future impairment of receivable rate. We estimate net impairment of receivables to be 0.8% - 1.2% of receivables in FY19E - FY22F We maintain our BUY call on Adhi Karya Tbk. (ADHI) with a lower end-of-FY20 target price of IDR1,550. Our TP implies 8.0x FY20F P/E and , -1 SD of its 5 years average P/E. Our stance is built on the consideration that valuation is currently undemanding as ADHI will generate 10.9% ROE with our TP representing 0.9x P/BV and the medium-long term growth outlook in the sector remains favorable. Upside risks to our call are: 1) significant new order growth in FY20F post FY19E delayed tenders, 2) obtaining LRT phase 2 project, 3) timely payments. Downside risks are: 1) Slower burn rate, 2) missed new contract achievement, and 3) low receivable recovery rate.

56

Stock Information

Bloomberg Ticker ADHI IJ

52-Week High 1,845

52-Week Low 1,060

FY20F P/E 8.0x

FY20F P/BV 0.9x




Current Price 1,225


% Change 26.5%


Revenue 15,655 15,574 17,819 20,859 24,207

% growth 3.3% -0.5% 14.4% 17.1% 16.1%

Gross Profit 2,507 2,346 2,567 3,027 3,493

Net Profit 644 651 690 838 1,013

% growth 25.0% 1.0% 6.1% 21.4% 20.9%

Gross Margin (%) 16.0% 15.1% 14.4% 14.5% 14.4%

Net Margin (%) 4.1% 4.2% 3.9% 4.0% 4.2%

Return on Equity (%) 10.3% 9.6% 10.9% 11.9% 12.9%

Return on Assets (%) 2.1% 2.1% 2.0% 2.1% 2.5%

EPS (IDR) 181 183 194 235 285

57

Construction | Adhi Karya

(IDR Bn) 2018 2019E 2020F 2021F 2022F


Receivables 15,351 16,576 17,257 19,915 20,459

Other CA 6,815 6,641 7,598 8,828 9,250

Total CA 25,430 25,830 28,809 33,277 35,050

Fixed assets 1,573 1,658 1,821 2,011 2,224

Intangible Assets - - - - -

Other LT Assets 3,116 3,857 3,630 3,715 3,803

Total Assets 30,119 31,345 34,260 39,003 41,077

Payables 12,548 12,175 14,037 16,412 19,064

ST loans 3,914 4,785 5,484 8,948 6,780

Other CL 2,503 2,377 2,736 3,200 3,716

Total CL 18,964 19,336 22,258 28,560 29,560

LT loans 4,640 5,031 5,455 3,200 3,437

Other 229 170 188 210 236


Share & APIC 2,945 2,945 2,945 2,945 2,945


Others & NCI 348 350 349 351 353

Total Equity 6,285 6,808 6,360 7,032 7,845


2018 2019E 2020F 2021F 2022F

Profitability

ROE 10.3% 9.6% 10.9% 11.9% 12.9%

ROA 2.1% 2.1% 2.0% 2.1% 2.5%

Gross Margin 16.0% 15.1% 14.4% 14.5% 14.4%



Liquidity

Current Ratio 1.3 1.3 1.3 1.2 1.2

Debt to Equity 1.4 1.4 1.7 1.7 1.3

Debt to Assets 0.3 0.3 0.3 0.3 0.2


Valuation


Price to Book (P/BV) 0.9 0.8 0.9 0.8 0.7


Order Book 61,131 51,938 73,120 85,021 96,850

New Contract 24,819 15,600 27,300 30,030 33,033

Burn Rate 40.3% 30.0% 28.0% 27.5% 27.5%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 15,655 15,574 17,819 20,859 24,207

% growth 3.3% -0.5% 14.4% 17.1% 16.1%

Cost of Revenue (13,149) (13,228) (15,252) (17,832) (20,714)

Gross Profit 2,507 2,346 2,567 3,027 3,493

% growth 21.8% -6.4% 9.4% 17.9% 15.4%

Operating Expenses (708) (786) (811) (949) (1,101)

Others (323) (619) (688) (850) (885)

EBIT 1,692 1,685 1,845 2,144 2,384

% growth 20.6% -0.4% 9.5% 16.2% 11.2%

EBITDA 1,868 1,860 2,048 2,378 2,655

% growth 22.4% -0.4% 10.1% 16.1% 11.6%

Net Financing (524) (566) (619) (678) (643)

EBT 1,168 1,119 1,226 1,466 1,741

Tax (523) (467) (535) (626) (726)

NCI 1 1 1 1 2

Net Profit 644 651 690 838 1,013

% growth 25.0% 1.0% 6.1% 21.4% 20.9%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 644 651 690 838 1,013

Depreciation 176 175 203 235 271

Chg. in NWC 276 1,549 (584) 1,050 (2,202)

CF from Operating 545 (723) 1,477 23 3,487


Chg. in LT Assets 1,121 742 (227) 85 88

Chg in LT Liabilities 1,121 742 (227) 85 88

CF from Investing (1,285) (1,061) (121) (487) (547)


Chg. in ST Loans 127 871 699 3,464 (2,169)

Chg. in LT Loans (26) 391 424 (2,254) 237

Dividends Paid 97 130 1,138 168 203

Others (132) 2 - 2 2

CF from Financing (128) 1,134 (16) 1,044 (2,133)

Beginning Cash 4,131 3,263 2,613 3,953 4,534

Change in Cash (868) (650) 1,340 580 807

Ending Cash 3,263 2,613 3,953 4,534 5,340



Construction Sector

PT Wijaya Karya Bangunan Gedung Tbk.

BUY

Potential new order realization delay, but long-term outlook still highly attractive. WEGE acquired IDR5.5tn of NC as of 11M19 (54%/46% of ours/company’s estimate). One large sized project worth ~IDR2tn in 2019’s pipeline may potentially be secured in 2020 instead. We forecast NC will grow by 15% in FY20F to reach IDR 11.7tn and bake in a 10% annual NC growth per annum thereafter. We made some adjustments to our model and cut FY19E/FY20F/FY21F earnings by 8.4%/9.5%/2.5% respectively. Even then, WEGE will still produce solid NPATMI growth of 3.8%/14.2%/23.5%. Improving OCF and leveraging up. Company targets year end OCF to be roughly +ve IDR100bn on the back of better receivable collection strategy. To fuel its upcoming concession projects, WEGE has increased gearing to 0.2x from zero. We view that a certain level of leverage is preferable to fuel progress especially for a rapidly growing company such as WEGE. Capital city relocation opportunity and modular growth. WEGE is strategically positioned to benefit from the capital city relocation due to its expertise. One opportunity that can be seized is the presidential palace project, which is funded by the national budget, is WEGE’s specialty segment. Additionally, management mentioned that the demand and interest for modular construction, which has higher margin and is one of WEGE’s business strategy going forward, has been positive and is gaining traction. Undemanding valuation amidst favorable sector outlook, capital city relocation, and modular expansion. We maintain our BUY call with a TP of IDR480, implying 8.7x FY20F P/E, which is a 15% discount from WIKA’s target P/E. We believe our valuation multiple is warranted as WEGE’s ROE is the highest in the sector at 20.8% in FY20F post IDR220bn of PSAK 71 impairment taken from retained earnings. WEGE’s core business, which is building construction will benefit from BI easing cycle. As company’s long term growth outlook is still highly attractive, WEGE is one of our top picks in the construction sector. Downside risks to our call are: 1) lower than expected NC achievement, and 2) higher than expected impairment of receivables.

58

Stock Information

Bloomberg Ticker WEGE IJ

52-Week High 434

52-Week Low 236

FY20F P/E 8.8x

FY20F P/BV 1.8x




Current Price 296

52-Week Target Price 480

% Change 62.2%


Revenue 5,823 6,169 7,567 9,559 11,263

% growth 49.3% 6.0% 22.7% 26.3% 17.8%

Gross Profit 597 622 772 977 1,173

Net Profit 444 461 527 650 772

% growth 50.6% 3.8% 14.2% 23.5% 18.8%

Gross Margin (%) 10.2% 10.1% 10.2% 10.2% 10.4%

Net Margin (%) 7.6% 7.5% 7.0% 6.8% 6.9%

Return on Equity (%) 23.3% 20.2% 20.8% 23.0% 23.2%

Return on Assets (%) 8.5% 7.6% 7.5% 7.5% 7.4%

EPS (IDR) 46 48 55 68 81

59

Construction | Wijaya Karya Bangunan Gedung

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalents 1,766 703 888 731 1,069

Receivables 2,806 3,549 3,939 4,976 5,863

Other CA 702 1,103 1,353 1,709 2,014

Total CA 5,275 5,355 6,180 7,416 8,946

Fixed Assets 222 343 451 567 686


Other LT Assets 393 595 1,201 1,610 1,617

Total Assets 5,890 6,293 7,833 9,593 11,249

Payables 2,696 2,154 2,824 3,567 4,194

ST Loans - 357 577 667 751

Other CL 184 513 627 791 930

Total CL 2,880 3,023 4,029 5,024 5,875

LT Loans - - - - -

Other 873 787 1,173 1,482 1,746


Share & APIC 1,480 1,480 1,480 1,480 1,480


Others & NCI 34 34 34 34 35

Total Equity 2,137 2,483 2,632 3,087 3,628

Total Equity & Lia-bilities 5,890 6,293 7,833 9,593 11,249

2018 2019E 2020F 2021F 2022F

Profitability

ROE 23.3% 20.2% 20.8% 23.0% 23.2%

ROA 8.5% 7.6% 7.5% 7.5% 7.4%

Gross Margin 10.2% 10.1% 10.2% 10.2% 10.4%



Liquidity

Current Ratio 1.8 1.8 1.5 1.5 1.5

Debt to Equity N/A 0.1 0.2 0.2 0.2

Debt to Assets N/A 0.1 0.1 0.1 0.1

ICR 1330.5 61.3 24.1 22.5 23.4

Valuation

Price to Earnings (P/E) 10.3 10.0 8.8 7.1 5.9

Price to Book (P/BV) 2.2 1.9 1.8 1.5 1.3


Order Book 16,416 23,166 28,841 33,340 37,539

New Contract 7,454 10,186 11,714 12,886 14,174

Burn Rate 44.5% 31.0% 29.0% 30.0% 30.0%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 5,823 6,169 7,567 9,559 11,263

% growth 49.3% 6.0% 22.7% 26.3% 17.8%

Cost of Revenue (5,226) (5,547) (6,795) (8,582) (10,091)

Gross Profit 597 622 772 977 1,173

% growth 28.7% 4.3% 24.0% 26.6% 20.0%


Others 87 62 58 68 79

EBIT 619 657 786 981 1,160

EBITDA 638 678 822 1,032 1,229

% growth 44.0% 6.4% 21.2% 25.5% 19.1%

Net Financing 48 20 (13) (23) (27)

Profit from JV 51 90 95 97 100

EBT 618 646 754 937 1,110

Tax (174) (185) (227) (287) (338)

NCI - - - - -

Net Profit 444 461 527 650 772

% growth 50.6% 3.8% 14.2% 23.5% 18.8%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 444 461 527 650 772

Depreciation 19 21 36 51 69

Chg. in NWC (304) 1,357 (146) 487 425

CF from Operating 767 (875) 708 214 416


Chg. In LT Assets 155 202 606 409 7

Chg. in LT Liabilities 141 (86) 386 309 264

CF from Investing (55) (430) (365) (267) 69

Chg. In Share & APIC - - - - -

Chg. in ST Loans (613) 357 220 90 84

Chg. in LT Loans - - - - -

Dividends Paid 57 115 378 195 232

Others 25 - - - -

CF from Financing (645) 242 (158) (105) (147)

Beginning Cash 1,699 1,766 703 888 731

Change in Cash 67 (1,063) 186 (157) 338

Ending Cash 1,766 703 888 731 1,069



Construction Sector

PT Wijaya Karya Beton Tbk.

BUY

Fair new contract achievement. WTON managed to secure IDR5.2tn new contracts (60%/57% of our/company’s estimate) as of 10M19. Top three projects obtained YTD are Pekanbaru - Padang toll road (IDR692bn), Bogor Outer Ring Road (IDR221bn), and Balikpapan - Samarinda toll road (IDR215bn). We expect WTON to continue its performance and grow its new contract achievement by 12.5% in FY20F and expand at a 11.6% CAGR in FY19E - FY22F. Even though NC obtained might miss in FY19E, top line will still grow healthily at a 14.2% FY19E - FY22F CAGR due to contract carryover of IDR6.4tn in FY19E. Robust earnings growth despite PSAK 71 impairment. Effective starting from 1 January 2020, WTON will impair IDR280bn (12.8% of receivables) to comply with the new accounting regulation. WTON will deduct IDR200bn of retained earnings and record an additional IDR80bn impairment expense on the income statement. Going forward, we forecast 7% impairment of receivables annually post the initial impairment based on the company’s provision policy according to receivables aging schedule. Despite the additional impairment expense from PSAK 71, we estimate WTON’s earnings to rise 7.0% YoY in FY19E and by 13.3% CAGR in FY19E - FY22F. Capacity expansion and ending the year with +ve OCF. WTON plans to expand its capacity to 4mn tons/year in FY20F as currently utilization rate is over 99% amidst high demand. Despite having recorded –ve OCF of IDR797bn in 9M19, company expects year end OCF to be approximately +ve IDR400bn. This consistent end of year +ve OCF balance should assist in keeping gearing ratio under control below 1.0x We upgrade PT Wijaya Karya Beton Tbk. (WTON) to BUY from ADD with end-of-FY20 target price of IDR570. Our TP implies 8.8x FY20F PE, which is a 15% discount from our target P/E for its parent and reflects –0.8 SD its 3 years average. WTON’s performance remains solid despite a challenging year for the whole sector while its future outlook remains promising. Risks to our call are: 1) missed new contract growth, 2) payment and project delays, and 3) worse than expected receivables impairment.

60

Stock Information

Bloomberg Ticker WTON IJ

52-Week High 680

52-Week Low 366

FY20F P/E 8.8x

FY20F P/BV 1.3x




Current Price 440


% Change 29.5%


Revenue 6,931 7,353 8,732 9,668 10,950

% growth 29.2% 6.1% 18.8% 10.7% 13.3%

Gross Profit 882 965 1,120 1,226 1,406

Net Profit 486 520 567 645 755

% growth 44.2% 7.0% 9.1% 13.7% 17.1%

Gross Margin (%) 12.7% 13.1% 12.8% 12.7% 12.8%

Net Margin (%) 7.0% 7.1% 6.5% 6.7% 6.9%

Return on Equity (%) 15.9% 14.8% 15.2% 15.3% 15.8%

Return on Assets (%) 5.5% 5.8% 5.5% 5.7% 6.0%

EPS (IDR) 56 60 65 74 87

61

Construction | Wijaya Karya Beton

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & equivalents 865 914 1,157 974 1,053

Receivables 1,213 1,213 1,093 1,346 1,501

Other CA 3,467 3,071 3,603 3,997 4,493

Total CA 5,871 5,544 6,264 6,772 7,561

Fixed assets 2,948 3,430 3,946 4,432 5,035


Other LT Assets 63 62 62 62 62

Total Assets 8,882 9,036 10,272 11,266 12,658

Payables 1,146 1,278 1,522 1,688 1,909

ST loans 1,455 1,721 2,149 2,099 2,396

Other CL 2,647 1,998 2,337 2,735 3,047

Total CL 5,248 4,996 6,009 6,523 7,352

LT loans 350 350 350 350 350

Other 107 107 107 107 107


Share & APIC 1,845 1,845 1,845 1,845 1,845


Others & NCI 14 70 67 64 60

Total Equity 3,137 3,583 3,805 4,286 4,849


2018 2019E 2020F 2021F 2022F

Profitability

ROE 15.9% 14.8% 15.2% 15.3% 15.8%

ROA 5.5% 5.8% 5.5% 5.7% 6.0%

Gross Margin 12.7% 13.1% 12.8% 12.7% 12.8%



Liquidity

Current Ratio 1.1 1.1 1.0 1.0 1.0

Debt to Equity 0.6 0.6 0.7 0.6 0.6

Debt to Assets 0.2 0.2 0.2 0.2 0.2


Valuation


Price to Book (P/BV) 1.6 1.4 1.3 1.2 1.0


Order Book 12,784 15,014 16,630 18,344 20,958

New Contract 7,664 8,623 9,485 10,434 11,999

Burn Rate 61.7% 53.5% 55.0% 55.0% 55.0%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 6,931 7,353 8,732 9,668 10,950

% growth 29.2% 6.1% 18.8% 10.7% 13.3%

Cost of Revenue (6,048) (6,388) (7,612) (8,442) (9,544)

Gross Profit 882 965 1,120 1,226 1,406

% growth 32.4% 9.4% 16.0% 9.5% 14.7%

Operating Expenses (150) (163) (177) (192) (207)

Others (23) (12) (84) (57) (77)

EBIT 709 790 859 977 1,121

% growth 40.6% 11.4% 8.8% 13.8% 14.7%

EBITDA 935 1,036 1,155 1,323 1,515

% growth 36.9% 10.8% 11.5% 14.5% 14.5%

Net Financing (90) (131) (141) (160) (165)

EBT 619 658 718 817 956

Tax (133) (141) (154) (175) (205)

NCI 382 (2,587) (2,823) (3,211) (3,758)

Net Profit 486 520 567 645 755

% growth 44.2% 7.0% 9.1% 13.7% 17.1%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 486 520 567 645 755

Depreciation 226 246 296 346 394

Chg. in NWC 270 141 (107) 128 178



Chg. in LT Assets 26 (1) - - -

Chg in LT Liabilities 43 (40) - - -



Chg. in ST Loans 10 266 429 (51) 297

Chg. in LT Loans 350 - - - -

Dividends Paid 122 130 142 161 189

Others - 58 - - -

CF from Financing 239 191 284 (215) 104

Beginning Cash 638 865 914 1,157 974

Change in Cash 227 49 443 (183) 79

Ending Cash 865 914 1,357 974 1,053



Construction Sector

PT Waskita Beton Precast Tbk.

NEUTRAL

Soft FY19E new contract accomplishment. As of 11M19, WSBP recorded IDR5.9tn (+21% YoY, 84% of our estimate and company's lowered guidance). This year’s underperformance was caused by the election year and also partly due to its reliance to internal contracts from WSKT. 11M19’s NC was 60% contributed externally and 40% internally from WSKT. Regardless of FY19E’s flattish new order growth, we see the company’s strategy to steadily diversify its contract source to be a positive in the long run. We estimate NC to grow by 36% in FY20F to IDR9.5tn (80% of company’s guidance) from FY19E’s low base. Low teens earnings growth caused by PSAK 71 impairment. WSBP plans to impair IDR150bn of receivables as an expense in the income statement to comply with PSAK 71. This drags earnings to grow only by 13.8% YoY in FY20F, however NPATMI will jump 21.4% in FY21F. Company shares that receivable impairment in PSAK 71 depends on days past due according to each project’s payment scheme. For turnkey projects, even if receivables has been outstanding for over a year, it might not need be impaired if the project agreement specifies that payment will be received after project completion. However, the exact details is yet to be clear. Margin to normalize due to reduced turnkey projects. We estimate that gross margin will drop 290 bps in FY19E and normalize to 21.5% in FY22F as there is only one turnkey project left in the order book set to finish in 1H20. Management prefers more turnkey projects due to its higher GPM but it seems unlikely in the near term as turnkey projects are mostly internal from WSKT and WSKT’s balance sheet is not able to support more turnkey projects at the moment. We maintain our NEUTRAL call on PT Waskita Beton Precast Tbk. (WSBP) with an end-of-FY20 target price of IDR350. Our TP implies 9.8x FY20F P/E and 1.0x P/BV. We believe this is fair given WSBP’s ROE of 10.2% in FY20F. Upside risk to our call is a surprise beat on new contract achievement as our estimates are conservative given historic performance. Downside risks to our call are: 1) unsuccessful diversification of project source, and 2) another lackluster year.

62

Stock Information

Bloomberg Ticker WSBP IJ

52-Week High 452

52-Week Low 288

FY20F P/E 9.8x

FY20F P/BV 1.0x




Current Price 324


% Change 8.0%


Revenue 8,000 7,867 8,891 9,617 10,491

% growth 12.6% -1.7% 13.0% 8.2% 9.1%

Gross Profit 1,846 1,587 1,889 2,076 2,260

Net Profit 1,103 815 927 1,126 1,215

% growth 10.3% -26.1% 13.8% 21.4% 8.0%

Gross Margin (%) 23.1% 20.2% 21.2% 21.6% 21.5%

Net Margin (%) 13.8% 10.4% 10.4% 11.7% 11.6%

Return on Equity (%) 14.0% 9.6% 10.2% 11.4% 11.3%

Return on Assets (%) 7.2% 4.7% 5.1% 5.5% 5.4%

EPS (IDR) 43 31 36 43 47

63

Construction | Waskita Beton Precast

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & equivalents 1,299 968 1,390 1,448 1,696

Receivables 5,518 7,338 8,079 9,542 10,351

Other CA 3,440 2,813 2,812 3,092 3,356

Total CA 10,236 11,106 12,268 14,066 15,387

Fixed assets 4,726 5,077 4,921 5,367 5,820


Other LT Assets 260 1,126 1,126 1,126 1,126

Total Assets 15,222 17,309 18,315 20,559 22,333

Payables 1,688 2,806 3,542 3,879 4,206

ST loans 5,463 5,379 4,989 6,093 6,673

Other CL 176 160 171 187 203

Total CL 7,327 8,346 8,702 10,159 11,082

LT loans - 496 496 496 496

Other 10 14 14 14 14


Share & APIC 6,581 6,581 6,581 6,581 6,581


Others & NCI (469) (469) (469) (469) (469)

Total Equity 7,882 8,453 9,102 9,890 10,741


2018 2019E 2020F 2021F 2022F

Profitability

ROE 14.0% 9.6% 10.2% 11.4% 11.3%

ROA 7.2% 4.7% 5.1% 5.5% 5.4%

Gross Margin 23.1% 20.2% 21.2% 21.6% 21.5%



Liquidity

Current Ratio 1.4 1.3 1.4 1.4 1.4

Debt to Equity 0.7 0.7 0.6 0.7 0.7

Debt to Assets 0.4 0.3 0.3 0.3 0.3


Valuation


Price to Book (P/BV) 1.2 1.1 1.0 0.9 0.8


Order Book 17,345 16,810 19,955 21,759 23,832

New Contract 6,665 6,998 9,518 10,469 11,516

Burn Rate 47.5% 44.5% 46.0% 46.0% 46.0%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 8,000 7,867 8,891 9,617 10,491

% growth 12.6% -1.7% 13.0% 8.2% 9.1%

Cost of Revenue (6,154) (6,280) (7,002) (7,541) (8,231)

Gross Profit 1,846 1,587 1,889 2,076 2,260

% growth -5.2% -14.0% 19.0% 9.9% 8.9%


Others 64,870 70,801 80,022 86,555 94,417

EBIT 1,715 1,434 1,596 1,883 2,053

% growth 12.0% -16.4% 11.3% 17.9% 9.1%

EBITDA 2,103 1,924 2,152 2,525 2,791

% growth 10.4% -8.5% 11.8% 17.4% 10.5%

Net Financing (321) (295) (301) (318) (363)

EBT 1,394 1,139 1,296 1,565 1,691

Tax (252) (285) (324) (391) (423)

NCI - - - - -

Net Profit 1,103 815 927 1,126 1,215

% growth 10.3% -26.1% 13.8% 21.4% 8.0%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 1,103 815 927 1,126 1,215

Depreciation 389 490 555 642 738

Chg. in NWC (868) 99 (8) 1,389 728

CF from Operating 2,360 1,206 1,490 379 1,225

Capital Expenditure 1,966 840 399 1,088 1,192

Chg. in LT Assets 64 866 - - -

Chg in LT Liabilities 3 2 - - -

CF from Investing (2,027) (1,705) (399) (1,088) (1,192)


Chg. in ST Loans 475 (84) (390) 1,104 580

Chg. in LT Loans - 496 - - -

Dividends Paid 747 245 278 338 365

Others 210 - - - -

CF from Financing (63) 167 (668) 766 216

Beginning Cash 1,028 1,299 968 1,390 1,448

Change in Cash 271 (331) 423 57 249

Ending Cash 1,299 968 1,390 1,448 1,696



Consumer Staples Sector

Potential Shrinking Pocket Size

NEUTRAL

Flattish social welfare budget allocation. The 2020

allocation for social welfare programs remains ample,

accounted for IDR 372.5tn, however only grow by 1%

YoY. We believe the flattish growth is pointing to the

shifting government’s focus more toward human capital

development through education and healthcare.

Education budget remains the same at 20% to total

budget while healthcare’s sees a bigger portion of 5.2%

next year (from previously 5%), equivalent to IDR

508.1tn and IDR 132.2tn respectively (+6.2% and

+13% YoY growth).

Shifting more to non-cash assistance. Regarding to

social assistance, government also puts more emphasis

on food subsidies (BPNT) rather than the conditional

cash transfer (PKH) next year, which is reflected by the

rising BPNT budget to IDR 28tn (+34.6% YoY) while

FY19E: not bad but not impressive as well.

Initially, we have high hopes for consumption recovery

to be more sound in 2019 following the abundant social

assistance budget (+32.8% from initial budget)

coupled with the legislative and presidential election

taking place in 1H19. However, household consumption

turned out to be growing moderately at 5.17%/5.01%

in 2Q/3Q19 respectively, did not show much changes

from the previous year. The modest consumption

recovery was also indicated by Nielsen’s 1H19 finding

of limited 1.8% YoY FMCG growth that all came from

ASP, as volume saw a 3.5% YoY decline. The staples

under our coverage managed to record sales growth of

7.6% as of 9M19, however we noticed it mostly came

from the companies that were innovative and actively

launching many new products in 2019. Another positive

thing in 2019 was most commodity based staples have

experienced mounting margins on the back of subdued

soft commodity prices along the year.

Anticipating spending constraint. Looking forward,

we foresee that next year’s consumption level will not

be too much different from 2019’s. This is due to the

concern on potential weakening purchasing power

driven by: 1) lower direct stimulus from government in

term of cash transfer, 2) higher living expenses, and 3)

moderate province minimal wage growth. All those

factors if we conclude may dampen purchasing power

and limit spending, particularly for low to middle

income classes, which may provide headwinds for the

overall staples sector.

64

Source: APBN 2020, MoF, Sinarmas Investment Research

Social welfare budget allocation (IDR Tn)

247.6258.4

271.5

346.3369.1 372.5

2015 2016 2017 2018 Outlook 2019 APBN 2020

+4.4% +5.1% +27.6% +6.6% +0.9%

Consumer Staples | Sector Outlook

low at least until 9M19, consequently most staples such

as ICBP, MYOR, and ROTI have experienced peaking

margins until 3Q19. However with the soft commodities

started signaling price uptrend (e.q. CPO and skim milk

powder have jumped by ~30-40%) and commodity

prices that will not be forever low, we expect margin

expansion ahead is unlikely and may normalize at any

time soon. Shrinking margins may as well come from a

lack of price adjustment options for staples amidst the

weak demand and intense competition environment.

We lower our stance to NEUTRAL for staples

sector. Our call is mainly on the concern that

consumption level will be nowhere from 2019’s. In

addition, staples’ margins are expected to normalize

following the soft commodities prices uptrend. Hence,

staples will face difficulties in bringing out satisfying

both top and bottom-line growth next year. Our top

picks in the sector are INDF and ROTI. We favor INDF

due to its exposure to commodity-related businesses

(Bogasari and agribusiness) which will be beneficial for

rising wheat and CPO prices, while ICBP normalizes.

INDF remains attractive on valuation perspective.

Meanwhile for ROTI, robust top-line growth may persist

on 2 additional new plants, strong GT distribution and

ASP adjustment next year. At the same time, ROTI’s

EBIT margin will keep on expanding on operating

efficiency.

PKH budget is scaled down by 15.4% to IDR 29.1tn.

The implication is that the 15.6mn food subsidy

recipients will be given daily staples consisting of rice,

eggs and other sources of nutrition worth of IDR 150k

monthly starting next year (vs IDR 100k per month in

2019). Meanwhile on the PKH program, government

decides to remove the fixed/regular assistance worth of

IDR 550k per household, means that each household

will only get PKH disbursement if they meet the

components such as pregnant mother, school children,

elderly, and etc. Although food subsidy may as well aid

purchasing power, yet we believe the impact may not

be as direct as cash transfers.

Shrinking pocket as living expenses rise. Low to

middle income classes’ purchasing power may be

pressurized by the potential higher living expenses in

2020. First, government decides to revoke electricity

subsidy for 900VA capable households, meaning the

group will face higher electricity tariff next year.

Second, the adjustment of BPJS Kesehatan premium

effectively starting 1 January 2020 with increases

ranging between 65% - 116% depend on the classes.

Third, the significant cigarette prices hike, could be

more than 20%. The excessive cigarette prices hike on

our view may have a meaningful impact to purchasing

power as in 2018, it contributes ~5.9% to the average

monthly spending per capita in Indonesia. While on the

income side, minimum wage is set to up by only 8.51%

in 2020, which may be insufficient to compensate the

surging expenses. As consumers’ pocket size only

increases moderately in 2020, hence FMCG spending

such as for F&B, confectioneries, personal care may be

at risk next year. Therefore, we conservatively assume

the staples within our coverage will book a mild top-

line growth of 6% in FY20F (vs 6.9% in FY19E).

Peaking margins, normalization should happen

soon. Ruling out the mild top-line growth, 2019 is

actually a good year for staples’ profitability, thanks to

the subdued soft commodity prices. Although recently

have picked up, soft commodity prices were staying

65


UNVR NEUTRAL 41,225 43,900 6.5 45.8

ICBP ADD 11,450 12,800 11.7 28.1

KLBF NEUTRAL 1,600 1,680 5.0 28.8

INDF BUY 7,750 9,200 18.7 15.8

MYOR NEUTRAL 2,020 2,160 6.9 26.7

SIDO ADD 1,275 1,400 9.8 24.5

ROTI BUY 1,300 1,540 18.5 30.2

UCID BUY 1,500 1,900 26.7 17.8

Consumer Staples sector

Source: Badan Pusat Statistik, Sinarmas Investment Research

HH Consumption may drop on rising living expenses


Soft commodities uptrend signal

4.94%4.95%

4.93%

4.97%

1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

HH Consumption

HH consumption dropped in 2017

on rising living expenses

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1/1/2018 5/1/2018 9/1/2018 1/1/2019 5/1/2019 9/1/2019

CPO Wheat Skim Milk Powder Sugar


PT Unilever Indonesia Tbk.

NEUTRAL

We reiterate our NEUTRAL call on PT Unilever Indonesia Tbk

(UNVR) with 52-week target price of IDR 43,900. Our TP

represents 6.5% potential upside, pegged to 45.8x FY20F PE (-

0.5SD from its 5-year average PE). We like UNVR’s strong

innovation and product portfolio, though only expect top-line to

grow moderately as slower consumption baked in next year.

Margins may contract on higher commodity prices (CPO and skim

milk powder) and product mix that involves more economically-

priced products. Considering the moderate growth and potential

margin shrinkage, we think UNVR is closely fairly valued at current

valuation. Upside risk to our call is robust consumption level.

Enriching product portfolio. We agree that UNVR’s strategy of

continuous innovation, enriching product portfolio is positive to

explore opportunities, bolster growth, and deal with competition. In

2019, UNVR was quite active on launching new products, for

instance “Nameera” as well as “Love Beauty and Planet” for skin

and personal care. For F&R, UNVR brought in the well-known

“Hellmann’s” mayonnaise. New ice cream line under “Seru!” brand

was also launched to cater low-end demand, priced at IDR 2-3k.

We also see that “Seru!” brand is to tackle the intensifying

competition in the ice cream segment since few years ago.

Mild sales on consumption downturn. Our concern on soft

consumption in 2020 could hold back UNVR’s sales volume growth,

while limited ASP adjustment may be applied as competition in

both segments keep on intensifying. In addition, UNVR’s growth

driver may as well come from newly launched products with low

price. Consequently, we only see UNVR’s FY20F top-line growth at

4.0%, slightly lower than GDP growth.

Potential margins shrinkage on higher soft commodity

prices. In 3Q19, UNVR experienced more than 240bps drop in both

HPC and F&R segment, which we believe was in-line with rising

CPO and milk powder prices. As we think that those soft

commodities price may not fall any time soon, GPM may potentially

decline further. We also note that F&R GPM drop on quarterly basis

may be on more on the low-priced products. We assume UNVR’s

GPM dilutes to 50.1% in FY20F, down 50bps from 2019E’s.

66

Stock Information

Bloomberg Ticker UNVR IJ

52-Week High 50,525

52-Week Low 40,350

FY20F P/E 45.8x

FY20F P/BV 47.1x






% Change 6.5%


Revenue 41,802 42,963 44,660 47,259 50,196

% growth 1.5% 2.8% 3.9% 5.8% 6.2%

Gross Profit 21,092 21,737 22,396 23,497 24,980

Net Profit 9,109 7,236 7,311 7,651 8,125

% growth 30.1% -20.6% 1.0% 4.7% 6.2%

Gross Margin (%) 50.5% 50.6% 50.1% 49.7% 49.8%

Net Margin (%) 21.8% 16.8% 16.4% 16.2% 16.2%

Return on Equity (%) 142.9% 99.3% 103.7% 105.7% 107.8%

Return on Assets (%) 47.4% 36.3% 35.7% 36.2% 36.6%

EPS (IDR) 1,194 948 958 1,003 1,065

67



Consumer Staples | Unilever Indonesia

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 41,802 42,963 44,660 47,259 50,196

% growth 1.5% 2.8% 3.9% 5.8% 6.2%

COGS (20,710) (21,226) (22,264) (23,762) (25,216)

% growth 3.6% 2.5% 4.9% 6.7% 6.1%

Gross Profit 21,092 21,737 22,396 23,497 24,980

% growth -0.6% 3.1% 3.0% 4.9% 6.3%


Opex to Sales (%) -27.8% -27.8% -27.9% -27.8% -27.8%

Other Inc (Exp) 2,823 (10) (10) (11) (11)

EBIT 12,279 9,772 9,917 10,356 10,991

% growth 29.3% -20.4% 1.5% 4.4% 6.1%

EBITDA 13,033 10,409 10,576 11,065 11,739

% growth 28.7% -20.1% 1.6% 4.6% 6.1%

Net Financing (93) (93) (137) (121) (122)

EBT 12,186 9,679 9,780 10,235 10,869

% growth 30.0% -20.6% 1.0% 4.7% 6.2%

Tax Expenses (3,076) (2,444) (2,469) (2,584) (2,744)

Net Income 9,109 7,236 7,311 7,651 8,125

% growth 30.1% -20.6% 1.0% 4.7% 6.2%

EPS (IDR) 1,194 948 958 1,003 1,065

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 9,109 7,236 7,311 7,651 8,125

Dep. & Amortization 755 637 659 709 748

Chg. In NWC 1,156 (1,125) 788 40 17


Capital Expenditure (960) (1,285) (1,138) (1,011) (1,029)

Chg. in LT Assets (28) 1 (23) (34) (32)

Chg. in LT Liabs (391) 301 (4) (4) 135

CF from Investing (1,378) (983) (1,165) (1,049) (926)


Chg. in Debt (2,990) 2,000 (400) - -

Dividends Paid (6,981) (7,824) (7,197) (7,389) (7,785)

Others 277 - - - -

CF from Financing (9,695) (5,824) (7,597) (7,389) (7,785)

Chg. in Cash (53) (60) (4) (39) 179

Beginning Cash 405 352 292 289 250

Ending Cash 352 292 289 250 429

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalents 352 292 289 250 429


Inventories 2,658 2,524 2,661 2,796 2,980

Other Current Assets 212 143 166 191 185

Total CA 8,325 8,472 8,330 8,963 9,714

Fixed Assets 10,627 11,276 11,755 12,057 12,338

Other Non CA 571 570 593 627 658

Total Assets 19,523 20,318 20,677 21,647 22,711

Short Term Debt 460 2,460 2,060 2,060 2,060

Trade Payables 6,684 6,613 6,870 7,369 7,818

Other CL 3,991 3,143 3,536 3,748 3,888

Total CL 11,135 12,217 12,466 13,177 13,766

Long Term Debt - - - - -

Other Non CL 810 1,111 1,107 1,103 1,238


Share & APIC 172 172 172 172 172


Others - - - - -

Total Equity 7,578 6,990 7,104 7,367 7,707

Total Liabilities & Equity

19,523 20,318 20,677 21,647 22,711

2018 2019E 2020F 2021F 2022F

Profitability

Return on Equity 142.9% 99.3% 103.7% 105.7% 107.8%

Return on Assets 47.4% 36.3% 35.7% 36.2% 36.6%

Gross Margin 50.5% 50.6% 50.1% 49.7% 49.8%


EBITDA Margin 31.2% 24.2% 23.7% 23.4% 23.4%

Net Margin 21.8% 16.8% 16.4% 16.2% 16.2%

Liquidity

Current Ratio (x) 0.7 0.7 0.7 0.7 0.7

Quick Ratio (x) 0.5 0.5 0.4 0.5 0.5

Solvency

Debt to Equity (x) 0.1 0.4 0.3 0.3 0.3

Debt to Assets (x) 0.0 0.1 0.1 0.1 0.1

Interest Cov. (x) 113.0 95.6 67.5 77.3 82.1

Valuation

Price to Earnings (x) 36.8 46.3 45.8 43.8 41.2

Price to Book (x) 44.2 47.9 47.1 45.5 43.5


PT Indofood CBP Sukses Makmur Tbk.

ADD

We maintain our ADD call on PT Indofood CBP Sukses

Makmur Tbk (ICBP) with 52-week target price of IDR

12,800. Our TP represents a potential upside of 11.7%, derived via

28.1x FY20F PE (its 5-year average PE). Waning consumption may

potentially affect ICBP’s top-line next year, not to mention the high

base in 2019. Competition outside noodles may still tough

especially from dairy, snack and beverage. Margins have seen the

peak in 2019, hence should normalize on rising input costs. Despite

the headwinds, we still like ICBP for being one of the best

consumption proxies in Indonesia, though it may provide only

limited upside from current price. Downside risk to our call is worse

than expected margins drop and competition.

Noodles to remain resilient, tough competition in other

segments. We view ICBP’s strategy for noodles by introducing new

products that follow the latest trend such as “ayam geprek” flavor

along with active engagements on social medias and marketing

activities have worked out very well. Consequently, sales volume

growth for noodles were up impressively by ~7% in 9M19, stronger

than the last few years. Not much issue in noodles we believe, as

ICBP manages to adjust its ASP by ~4% annually. On the flip side,

competitions in dairy, snack and beverage remain concerning, as

several newly launched products from local FMCG players have

flooded the market, which may threaten ICBP’s market share. If

competition heats up, ICBP may have to raise its promotional

expenses which may end up in a lower operating margin ahead.

Margins may normalize in the upcoming quarters. The recent

uptrend signal of soft commodities may raise a concern on ICBP’s

margins onwards as it translate into higher costs. From end of

3Q19 to current, commodities such as wheat/CPO/sugar have seen

significant hikes of ~14.8%/39%/16.4%. We now assume declining

margins starting 4Q19 and last in the upcoming quarters on our

bullish view on soft commodity ahead.

Prefer taking exposure on ICBP through INDF at current.

Until mid Dec-19, ICBP has outperformed INDF by 5.6%, and we

believe INDF now bears more potential upside as the uptrend in

soft commodity prices such as wheat and CPO will benefit INDF.

68

Stock Information

Bloomberg Ticker ICBP IJ

52-Week High 12,550

52-Week Low 8,950

FY20F P/E 28.1x

FY20F P/BV 5.3x






% Change 11.7%


Revenue 38,413 42,899 45,599 48,842 52,318

% growth 7.9% 11.7% 6.3% 7.1% 7.1%

Gross Profit 12,266 14,690 15,422 16,353 17,475

Net Profit 4,576 5,044 5,311 5,565 5,937

% growth 20.5% 10.2% 5.3% 4.8% 6.7%

Gross Margin (%) 31.9% 34.2% 33.8% 33.5% 33.4%

Net Margin (%) 11.9% 11.8% 11.6% 11.4% 11.3%

Return on Equity (%) 21.3% 20.9% 19.8% 18.9% 18.4%

Return on Assets (%) 13.9% 13.9% 13.4% 12.9% 12.7%

EPS (IDR) 392 432 455 477 509

69



Consumer Staples | Indofood CBP Sukses Makmur

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 38,413 42,899 45,599 48,842 52,318

% growth 7.9% 11.7% 6.3% 7.1% 7.1%

COGS (26,148) (28,209) (30,177) (32,489) (34,842)

% growth 6.5% 7.9% 7.0% 7.7% 7.2%

Gross Profit 12,266 14,690 15,422 16,353 17,475

% growth 10.9% 19.8% 5.0% 6.0% 6.9%


Opex to Sales (%) -16.9% -17.3% -17.4% -17.6% -17.7%

Other Inc (Exp) 676 172 234 223 254

EBIT 6,448 7,458 7,724 8,002 8,494

% growth 23.5% 15.7% 3.6% 3.6% 6.1%

EBITDA 7,182 8,480 8,917 9,351 9,971

% growth 22.9% 18.1% 5.2% 4.9% 6.6%

Net Financing (1) (33) 15 23 67

EBT 6,447 7,425 7,739 8,025 8,561

% growth 23.8% 15.2% 4.2% 3.7% 6.7%

Tax Expenses (1,788) (2,059) (2,090) (2,167) (2,311)

Net Income 4,576 5,044 5,311 5,565 5,937

% growth 20.5% 10.2% 5.3% 4.8% 6.7%

EPS (IDR) 392 432 455 477 509

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 4,576 5,044 5,311 5,565 5,937

Dep. & Amortization 817 1,344 1,532 1,642 1,790

Chg. In NWC (975) 793 (220) (6) (315)



Chg. in LT Assets (2,584) 28 (1,201) (435) (964)

Others (51) (268) (282) (233) (249)



Chg. in Debt 81 (248) - - -

Dividends Paid (1,889) (2,288) (2,774) (2,921) (3,061)

Others -569 378 347 245 332


Chg. in Cash (4,070) 1,784 (288) 1,357 1,469

Beginning Cash 8,797 4,727 6,511 6,223 7,580

Ending Cash 4,727 6,511 6,223 7,580 9,049

(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 4,001 4,032 4,466 4,726 5,112

Other Current Assets 1,122 1,015 992 1,023 1,095

Total CA 14,122 15,848 16,240 18,078 20,343

Fixed Assets 10,742 12,720 14,527 15,677 16,200

Other Non CA 9,504 9,475 10,677 11,112 12,076

Total Assets 34,367 38,043 41,443 44,867 48,619

Short Term Debt 1,393 1,168 1,190 1,215 1,240

Trade Payables 3,706 3,998 4,277 4,605 4,938

Other CL 2,136 2,557 2,716 2,838 2,959

Total CL 7,235 7,723 8,183 8,657 9,138

Long Term Debt 852 852 852 852 852

Other Non CL 3,573 3,972 4,319 4,564 4,896


Share & APIC 6,569 6,569 6,569 6,569 6,569


Others 1,109 1,143 1,200 1,260 1,323

Total Equity 22,707 25,497 28,090 30,795 33,734


34,367 38,043 41,443 44,867 48,619

2018 2019E 2020F 2021F 2022F

Profitability

Return on Equity 21.3% 20.9% 19.8% 18.9% 18.4%

Return on Assets 13.9% 13.9% 13.4% 12.9% 12.7%

Gross Margin 31.9% 34.2% 33.8% 33.5% 33.4%


EBITDA Margin 18.7% 19.8% 19.6% 19.1% 19.1%

Net Margin 11.9% 11.8% 11.6% 11.4% 11.3%

Liquidity

Current Ratio (x) 2.0 2.1 2.0 2.1 2.2

Quick Ratio (x) 1.2 1.4 1.3 1.4 1.5

Solvency

Debt to Equity (x) 0.10 0.08 0.07 0.07 0.06

Debt to Assets (x) 0.07 0.05 0.05 0.05 0.04

Interest Cov. (x) 28.6 38.9 44.0 45.5 48.3

Valuation


Price to Book (x) 6.6 5.9 5.3 4.8 4.4


PT Kalbe Farma Tbk.

NEUTRAL

We maintain our NEUTRAL recommendation on PT Kalbe

Farma Tbk (KLBF) with 52-week target price of IDR 1,680.

Our TP represents 5.0% potential upside, pegged to 28.8x FY20F

PE (0.75SD below its 5-year average historical PE) which also

implies a 26.9x forward PE. We expect KLBF’s performance will be

nowhere from 2019’s, with potential persisting margin contraction

stemming from higher unbranded generic drugs, lower nutritionals’

margin as skim milk powder surge fully baked in and product mix.

We may turn more positive on KLBF if the biosimilar products could

offset the declining margin in pharma stronger than our expectation

along with more clarity on the R&D tax incentive.

What we expect in 2020? We are of the view that the unbranded

generic drugs portion may keep on a rise, could be up to 25%

(from 21% as of 9M19) that keep pharma’s GPM under pressure. In

addition, nutritionals’ GPM will continue to deplete on the 35.8%

YTD appreciation in skim milk powder. Growth in the nutritionals

will still be derived from the medium priced products (shift from

Morinaga Platinum to Morinaga Gold to persist) on consumption

level issue. In all, we foresee KLBF’s top and bottom-line to expand

by 7%/5.5% YoY in FY20F is similar to 2019’s, while GPM and NPM

are slightly squeezed to 46%/11.3% (from 46.3%/11.5% for

FY19E).

How low can it go?. In the recent years, KLBF has focused to

promote operating efficiency to offset the impact of creeping down

GPM. As of 9M19, KLBF again had successfully lowered its opex to

sales to 31.8% (vs 33.7% in 9M18), which stabilized NPM at

11.4%. Be that it may already below its 5-year average of 33%, we

see limited rooms for further expense savings.

Waiting for more clarity on biosimilar and R&D tax

deduction. The long-awaited biosimilar plant is expected to start

commercializing next year which should be positive for KLBF as the

products provide better margins compared to the unbranded

generic, however it may need some time to be material for overall

KLBF’s performance. To add, the plan of government’s attributing

R&D tax deduction should be positive for KLBF although the details

of what costs could be claimed are yet to come.

70

Stock Information

Bloomberg Ticker KLBF IJ

52-Week High 1,690

52-Week Low 1,260

FY20F P/E 28.8x

FY20F P/BV 4.4x




Current Price 1,600


% Change 5.0%


Revenue 21,074 22,595 24,207 26,321 28,470

% growth 4.4% 7.2% 7.1% 8.7% 8.2%

Gross Profit 9,848 10,456 11,131 12,082 13,055

Net Profit 2,457 2,595 2,735 2,967 3,239

% growth 2.2% 5.6% 5.4% 8.5% 9.2%

Gross Margin (%) 46.7% 46.3% 46.0% 45.9% 45.9%

Net Margin (%) 11.7% 11.5% 11.3% 11.3% 11.4%

Return on Equity (%) 16.8% 16.3% 15.8% 15.8% 15.8%

Return on Assets (%) 14.1% 13.7% 13.3% 13.3% 13.4%

EPS (IDR) 52 55 58 63 69

71



Consumer Staples | Kalbe Farma

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 21,074 22,595 24,207 26,321 28,470

% growth 4.4% 7.2% 7.1% 8.7% 8.2%

COGS (11,226) (12,140) (13,076) (14,238) (15,415)

% growth 8.3% 8.1% 7.7% 8.9% 8.3%

Gross Profit 9,848 10,456 11,131 12,082 13,055

% growth 0.4% 6.2% 6.5% 8.5% 8.0%


Opex to Sales (%) -31.0% -31.1% -31.1% -31.1% -31.0%

Other Inc (Exp) (103) (82) (90) (91) (103)

EBIT 3,210 3,349 3,520 3,811 4,135

% growth 1.7% 4.2% 5.1% 8.3% 8.5%

EBITDA 3,563 3,845 4,053 4,375 4,715

% growth 1.0% 7.9% 5.4% 7.9% 7.8%

Net Financing 96 106 118 135 167

EBT 3,306 3,455 3,639 3,946 4,301

% growth 2.0% 4.5% 5.3% 8.4% 9.0%

Tax Expenses (809) (818) (859) (930) (1,009)

Net Income 2,457 2,595 2,735 2,967 3,239

% growth 2.2% 5.6% 5.4% 8.5% 9.2%

EPS (IDR) 52 55 58 63 69

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 2,457 2,595 2,735 2,967 3,239


Chg. In NWC (78) (408) (432) (562) (551)


Capital Expenditure (1,343) (1,100) (1,100) (1,000) (600)

Chg. in LT Assets (14) (86) (113) (114) (129)

Others 111 (42) (45) (48) (53)

CF from Investing (1,246) (1,228) (1,258) (1,163) (781)


Chg. in Debt 16 - - - -

Dividends Paid (1,172) (1,229) (1,298) (1,367) (1,484)

Others 12 (36) 28 35 31


Chg. in Cash 369 233 353 522 1,088

Beginning Cash 2,785 3,153 3,386 3,739 4,261

Ending Cash 3,153 3,386 3,739 4,261 5,349

(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 3,475 3,757 4,047 4,407 4,771

Other Current Assets 765 895 937 1,018 1,111

Total CA 10,648 11,529 12,462 13,752 15,629

Fixed Assets 6,253 6,857 7,424 7,861 7,880

Other Non CA 1,245 1,331 1,444 1,559 1,687

Total Assets 18,146 19,717 21,330 23,172 25,196

Short Term Debt 69 69 69 69 69

Trade Payables 1,700 1,838 1,980 2,156 2,334

Other CL 517 619 626 656 716

Total CL 2,286 2,526 2,674 2,881 3,118

Long Term Debt 260 260 260 260 260

Other Non CL 306 338 367 402 433


Share & APIC 435 435 435 435 435


Others 787 718 718 718 718

Total Equity 15,295 16,592 18,029 19,629 21,385


18,146 19,717 21,330 23,172 25,196

2018 2019E 2020F 2021F 2022F

Profitability

Return on Equity 16.8% 16.3% 15.8% 15.8% 15.8%

Return on Assets 14.1% 13.7% 13.3% 13.3% 13.4%

Gross Margin 46.7% 46.3% 46.0% 45.9% 45.9%


EBITDA Margin 16.9% 17.0% 16.7% 16.6% 16.6%

Net Margin 11.7% 11.5% 11.3% 11.3% 11.4%

Liquidity

Current Ratio (x) 4.7 4.6 4.7 4.8 5.0

Quick Ratio (x) 2.8 2.7 2.8 2.9 3.1

Solvency

Debt to Equity (x) 0.02 0.02 0.02 0.02 0.02

Debt to Assets (x) 0.02 0.02 0.02 0.01 0.01

Interest Cov. (x) 108.0 95.7 103.8 104.4 106.6

Valuation


Price to Book (x) 5.1 4.7 4.4 4.0 3.7


PT Indofood Sukses Makmur Tbk.

BUY

We reiterate our BUY call on PT Indofood Sukses Makmur

Tbk (INDF) with 52-week target price of IDR 9,200. Our

SOTP based TP represents 18.8% potential upside, implying 15.8x

FY20F PE. On the concern of waning consumption and potential

pick up in soft commodity prices, we prefer INDF than ICBP. While

ICBP’s performance may normalize in the upcoming quarters,

Bogasari and agribusiness’ could be prominent for INDF. INDF

currently trades at 13.3x forward PE which we believe is a good

consumer name at bargain price. Therefore, INDF should re-rate

following the spike in CPO price and lessen its discount toward

ICBP. Downside risks to our call are IDR depreciation and M&A

action that could weaken liquidity and leverage position.

ICBP’s performance may normalize next year. ICBP remained

the backbone for INDF in 2019. However, we are anticipating for

ICBP’s performance to be less exciting on 1) modest growth as

consumption dips, 2) potential margins normalizing on higher soft

commodity prices and 3) competition remains tough, especially in

dairy, snack and beverage. All things considered, we have a

stronger conviction on INDF expecting a more stable performance

supported by the uprising of commodity-related businesses.

Blessings from commodity-related businesses. Throughout

2019, INDF’s agribusiness performance was dragged down severely

by the sluggish CPO price. Up to 9M19, CPO price was averaging at

MYR 2,050/ton before started crawling up to the current level of

MYR 2,850/ton. Following our bullish stance on CPO with an

assumption of average MYR 2,500/ton for next year (+16.2% from

FY19E’s), an uptick in agribusiness’ EBIT margin should be visible

starting 4Q19 and afterwards. Furthermore, brighter outlook will as

well come from Bogasari following the 13% rise in wheat price

since end of 3Q19, that could lead Bogasari resuming ASP increase

ahead (after 3-4% cut in Jul-19). We are now seeing 7%/5% YoY

growth for agribusiness/Bogasari top-line with both EBIT margins

at 6% (1.8%/6.5% in FY19E for agribusiness/Bogasari).

Favorable CPO proxy. We believe that investors with liquity and

size concern on CPO stocks could favor INDF on its exposure to

agribusiness.

72

Stock Information

Bloomberg Ticker INDF IJ

52-Week High 8,050

52-Week Low 5,850

FY20F P/E 15.8x

FY20F P/BV 1.4x




Current Price 7,750


% Change 18.7%


Revenue 73,395 77,857 82,557 87,418 92,363

% growth 4.6% 6.1% 6.0% 5.9% 5.7%

Gross Profit 20,212 22,657 23,976 25,299 26,753

Net Profit 4,166 4,752 5,104 5,489 5,843

% growth 0.2% 14.1% 7.4% 7.5% 6.5%

Gross Margin (%) 27.5% 29.1% 29.0% 28.9% 29.0%

Net Margin (%) 5.7% 6.1% 6.2% 6.3% 6.3%

Return on Equity (%) 8.6% 9.2% 9.2% 9.3% 9.3%

Return on Assets (%) 4.5% 4.9% 5.1% 5.3% 5.4%

EPS (IDR) 474 541 581 625 666

73



Consumer Staples | Indofood Sukses Makmur

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 73,395 77,857 82,557 87,418 92,363

% growth 4.6% 6.1% 6.0% 5.9% 5.7%

COGS (53,183) (55,200) (58,581) (62,119) (65,610)

% growth 5.5% 3.8% 6.1% 6.0% 5.6%

Gross Profit 20,212 22,657 23,976 25,299 26,753

% growth 2.2% 12.1% 5.8% 5.5% 5.7%


Opex to Sales (%) -16.7% -17.5% -17.2% -17.2% -17.3%

Other Inc (Exp) 1,215 369 372 387 436

EBIT 9,143 9,380 10,139 10,630 11,217

% growth 5.3% 2.6% 8.1% 4.8% 5.5%

EBITDA 11,865 12,430 13,426 14,155 14,980

% growth -16.5% 4.8% 8.0% 5.4% 5.8%

Net Financing (1,696) (1,020) (1,159) (973) (937)

EBT 7,447 8,360 8,980 9,657 10,280

% growth -1.9% 12.3% 7.4% 7.5% 6.5%

Tax Expenses (2,485) (2,700) (2,900) (3,119) (3,320)

Net Income 4,166 4,752 5,104 5,489 5,843

% growth 0.2% 14.1% 7.4% 7.5% 6.5%

EPS (IDR) 474 541 581 625 666

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 4,166 4,752 5,104 5,489 5,843

Dep. & Amortization 3,544 3,957 4,262 4,573 4,878

Chg. In NWC (1,847) 556 (1,312) (532) (815)



Chg. in LT Assets (4,916) (926) (1,325) (1,433) (1,235)

Others (49) (93) (119) (150) (173)



Chg. in Debt 5,409 (3,832) (368) (326) (2,278)

Dividends Paid (2,081) (2,086) (2,379) (2,556) (2,748)

Others (3,218) 1,954 508 525 534

CF from Financing 110 (3,963) (2,239) (2,357) (4,493)

Chg. in Cash (4,880) (1,094) (1,006) 214 (1,371)

Beginning Cash 13,690 8,809 7,715 6,709 6,923

Ending Cash 8,810 7,715 6,709 6,923 5,551

(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 11,644 11,404 12,464 13,025 13,859

Other Current Assets 6,247 4,904 5,040 5,181 5,324

Total CA 33,273 30,907 31,798 33,160 33,219

Fixed Assets 42,388 44,716 46,806 48,659 50,274

Other Non CA 20,877 21,803 23,128 24,560 25,795

Total Assets 96,538 97,426 101,732 106,379 109,289

Short Term Debt 22,237 17,034 17,063 19,093 17,150

Trade Payables 5,501 5,709 6,059 6,425 6,786

Other CL 3,466 4,014 4,249 4,499 4,754

Total CL 31,204 26,758 27,371 30,018 28,690

Long Term Debt 7,490 8,861 8,464 6,108 5,773

Other Non CL 7,927 8,409 8,917 9,442 9,976


Share & APIC 1,162 1,162 1,162 1,162 1,162


Others 25,451 26,266 27,122 28,021 28,964

Total Equity 49,917 53,398 56,979 60,811 64,850


96,538 97,426 101,732 106,379 109,289

2018 2019E 2020F 2021F 2022F

Profitability

Return on Equity 8.6% 9.2% 9.2% 9.3% 9.3%

Return on Assets 4.5% 4.9% 5.1% 5.3% 5.4%

Gross Margin 27.5% 29.1% 29.0% 28.9% 29.0%


EBITDA Margin 16.2% 16.0% 16.3% 16.2% 16.2%

Net Margin 5.7% 6.1% 6.2% 6.3% 6.3%

Liquidity

Current Ratio (x) 1.1 1.2 1.2 1.1 1.2

Quick Ratio (x) 0.5 0.5 0.5 0.5 0.5

Solvency

Debt to Equity (x) 0.6 0.5 0.4 0.4 0.4

Debt to Assets (x) 0.3 0.3 0.3 0.2 0.2

Interest Cov. (x) 4.5 5.3 6.3 7.1 8.2

Valuation


Price to Book (x) 1.6 1.5 1.4 1.3 1.2


PT Mayora Indah Tbk.

NEUTRAL

We lower our rating from ADD to NEUTRAL on PT Mayora

Indah Tbk (MYOR) with 52-week target price of IDR 2,160.

Our TP which represents 6.9% limited potential upside, is pegged

to 26.7x FY20F PE (-1SD from its 5-year average PE). MYOR’s

outlook turns less attractive as it now faces difficulty to see double-

digit volume growth, both in domestic and export market. Margins

contraction will be an issue next year due to the recent surge in

wheat and coffee prices. A&P expenses may remain high as

competition is not loosening up in the near time. Positives on MYOR

are the healthy balance sheet position and strong brand equity.

Expecting mid single-digit top-line growth in 2020. We do not

see MYOR being able to return to its best performance soon as

competition seems to step up rapidly both in domestic and export

market. For domestic, local players have tapped into the instant

coffee segment such as “Neo Coffee” and “Delizio Caffino” from

Wings and Djarum Group respectively. In addition, coffee war is

also brewing in Philippines with the two coffee makers there, Nestle

and Universal Robina, post MYOR’s plan to invest US$ 80mn over 5

years for a new plant in Philippines. In addition to competition, the

potential domestic consumption dip may also restrain MYOR volume

growth, as most its products are well-targeted the low to middle

income. For FY20F, we forecast MYOR’s top-line grow by 5.9% YoY,

quite evenly between domestic and export.

Expecting profitability normalization ahead. MYOR’s GPM is

expected to drop in 4Q19 onwards on the recent surge in wheat

and coffee prices (+14%/+23.5% from end 3Q19). In the

meantime, opex will remain elevated at ~18% (above 13.8% for

FY14-18 average; 19.6% for 9M19) to tackle competition and

maintan market share. As a result, we see FY20F GPM/OPM at

29%/11% (vs 30%/11.6% in FY19E).

De-rating on growth uncertainty. Historically, MYOR was traded

premium at >30x PE on robust volume growth, at 14.7% CAGR

FY14-18. However, the doubt on robust volume growth visibility

ahead has led MYOR to de-rate throughout 2019. Though current

valuation may already seem attractive, yet we still wait for more

clarity on future volume outlook for MYOR.

74

Stock Information

Bloomberg Ticker MYOR IJ

52-Week High 2,750

52-Week Low 1,950

FY20F P/E 26.7x

FY20F P/BV 4.5x




Current Price 2,020


% Change 6.9%


Revenue 24,061 24,676 26,122 28,290 30,717

% growth 15.6% 2.6% 5.9% 8.3% 8.6%

Gross Profit 6,397 7,422 7,564 7,957 8,570

Net Profit 1,716 1,677 1,810 2,064 2,271

% growth 7.6% -2.3% 7.9% 14.0% 10.1%

Gross Margin (%) 26.6% 30.1% 29.0% 28.1% 27.9%

Net Margin (%) 7.1% 6.8% 6.9% 7.3% 7.4%

Return on Equity (%) 21.6% 18.5% 17.7% 18.0% 17.6%

Return on Assets (%) 10.6% 9.5% 9.9% 10.5% 11.0%

EPS (IDR) 77 75 81 92 102

75



Consumer Staples | Mayora Indah

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 24,061 24,676 26,122 28,290 30,717

% growth 15.6% 2.6% 5.9% 8.3% 8.6%

COGS (17,664) (17,255) (18,558) (20,333) (22,147)

% growth 11.5% -2.3% 7.6% 9.6% 8.9%

Gross Profit 6,397 7,422 7,564 7,957 8,570

% growth 28.6% 16.0% 1.9% 5.2% 7.7%


Opex to Sales (%) -15.7% -18.5% -18.0% -16.8% -16.8%

EBIT 2,628 2,854 2,863 3,198 3,419

% growth 6.8% 8.6% 0.3% 11.7% 6.9%

EBITDA 3,177 3,432 3,481 3,857 4,121

% growth 5.9% 8.0% 1.4% 10.8% 6.8%

Net Financing (446) (455) (394) (375) (315)

Others 200 (108) 3 (3) (1)

EBT 2,382 2,291 2,472 2,820 3,103

% growth 8.9% -3.8% 7.9% 14.1% 10.0%

Tax Expenses (622) (573) (618) (705) (776)

Net Income 1,716 1,677 1,810 2,064 2,271

% growth 7.6% -2.3% 7.9% 14.0% 10.1%

EPS (IDR) 77 75 81 92 102

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 1,716 1,677 1,810 2,064 2,271


Chg. In NWC (1,791) 866 (492) (639) (635)

CF from Operating 507 3,142 1,963 2,115 2,372


Chg. in LT Assets (433) 207 (44) (118) 5

Chg. in LT Liabs 45 57 65 66 104

CF from Investing (1,206) (600) (828) (900) (812)


Chg. in Debt 1,553 (1,128) (147) (185) (1,271)

Dividends Paid (604) (687) (671) (724) (826)

Others 44 67 - - -

CF from Financing 994 (1,747) (818) (909) (2,097)

Chg. in Cash 294 795 317 306 (536)

Beginning Cash 2,202 2,496 3,291 3,608 3,914

Ending Cash 2,496 3,291 3,608 3,914 3,378

(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 3,352 2,528 2,648 2,935 3,149


Total CA 12,648 12,674 13,635 14,801 15,140

Fixed Assets 4,258 4,544 4,774 4,964 5,184

Other Non CA 686 479 523 640 635

Total Assets 17,592 17,697 18,932 20,406 20,960

Short Term Debt 2,630 1,866 1,866 2,914 2,365

Trade Payables 1,625 1,692 1,841 1,999 2,182

Other CL 509 540 542 606 664

Total CL 4,765 4,098 4,249 5,519 5,211

Long Term Debt 3,377 3,014 2,867 1,634 911

Other Non CL 907 964 1,029 1,096 1,200


Share & APIC 448 448 448 448 448


Others 194 220 246 278 312

Total Equity 8,543 9,621 10,786 12,157 13,637


17,592 17,697 18,932 20,406 20,960

2018 2019E 2020F 2021F 2022F

Profitability

Return on Equity 21.6% 18.5% 17.7% 18.0% 17.6%

Return on Assets 10.6% 9.5% 9.9% 10.5% 11.0%

Gross Margin 26.6% 30.1% 29.0% 28.1% 27.9%


EBITDA Margin 13.2% 13.9% 13.3% 13.6% 13.4%

Net Margin 7.1% 6.8% 6.9% 7.3% 7.4%

Liquidity

Current Ratio (x) 2.7 3.1 3.2 2.7 2.9

Quick Ratio (x) 1.8 2.3 2.4 2.0 2.1

Solvency

Debt to Equity (x) 0.7 0.5 0.4 0.4 0.2

Debt to Assets (x) 0.3 0.3 0.2 0.2 0.2

Interest Cov. (x) 5.3 5.9 6.6 7.8 9.6

Valuation


Price to Book (x) 5.7 5.0 4.5 4.0 3.5


PT Industri Jamu dan Farmasi Sido Muncul Tbk.

ADD

We reiterate our ADD rating on PT Sido Muncul Tbk (SIDO)

with 52-week target price of IDR 1,400. Our TP represents

9.8% potential upside, deriving from FY20F PE of 24.5x (+1.75SD

from its 2-year historical average PE). SIDO’s share price has

experienced significant appreciation at ~50% YTD due to its robust

performance, yet still leaves some room for re-rating considering

its healthy balance sheet and appealing profitability. SIDO’s ROE

could hit 26.2%/25.9% in FY19E/FY20F, higher than 19.3% the

average ROE of the staples under our coverage. Therefore, we

expect SIDO which now trades at 22.5x forward PE to move toward

twenties mid times PE. Upside risk is continuing margin expansion.

Growth visibility is there, but may be moderate on potential

sluggish consumption next year. We are of the view that SIDO

still carries potential volume growth ahead, as its COD II plant

currently still runs at ~55-60% utilization rate. For the domestic

market, SIDO will maintain its focus on the eastern part of

Indonesia as growth is stronger there. However in the event of

potential weakening consumption next year we believe it could

pose risks to SIDO’s domestic sales. Consequently, we turn more

conservative and forecast SIDO’s top-line to grow by 7.9% YoY in

FY20F, lower than management’s annual guidance of 10% growth.

Keeping an eye on export market. Being successfully tapped

into the export market through three main destination countries

(Philippines, Malaysia and Nigeria), SIDO aims to widen its export

to other countries such as Myanmar, Vietnam, Arab etc. So far, it

has been fruitful for SIDO’s export contribution to sales have

escalated rapidly to 5% as of 9M19 (vs 2% in FY18). However, the

worrying thing is that fierce competition is seen in Philippines

(SIDO’s biggest export contributor) whereas “Tolak Angin”

competes head-to-head with the market leader “Lola Remedios”

who is very aggressive in marketing activities.

Peaking margins, less room to expand. As of 9M19, SIDO’s

GPM reached 54.4% (+290bps from FY18) which may be on the

continuation of production efficiency. Afterwards, we expect it to be

stable at ~54%, utilizing less volatility in raw materials as most are

sourced domestically.

76

Stock Information

Bloomberg Ticker SIDO IJ

52-Week High 1,355

52-Week Low 750

FY20F P/E 24.5x

FY20F P/BV 6.2x




Current Price 1,275


% Change 9.8%


Revenue 2,763 2,981 3,216 3,451 3,707

% growth 7.4% 7.9% 7.9% 7.3% 7.4%

Gross Profit 1,424 1,620 1,736 1,863 2,001

Net Profit 664 795 844 902 968

% growth 24.4% 19.8% 6.2% 6.8% 7.3%

Gross Margin (%) 51.5% 54.3% 54.0% 54.0% 54.0%

Net Margin (%) 24.0% 26.7% 26.2% 26.1% 26.1%

Return on Equity (%) 22.9% 26.2% 25.9% 26.0% 26.2%

Return on Assets (%) 20.4% 23.3% 23.3% 23.2% 23.3%

EPS (IDR) 45 53 57 61 65

77



Consumer Staples | Industri Jamu dan Farmasi Sido Muncul

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 2,763 2,981 3,216 3,451 3,707

% growth 7.4% 7.9% 7.9% 7.3% 7.4%

COGS (1,339) (1,361) (1,480) (1,588) (1,706)

% growth -3.6% 1.7% 8.7% 7.3% 7.4%

Gross Profit 1,424 1,620 1,736 1,863 2,001

% growth 20.2% 13.7% 7.2% 7.3% 7.4%


Opex to Sales (%) -22.3% -21.1% -21.2% -21.4% -21.5%

Other Inc (Exp) 17 19 19 21 23

EBIT 824 1,009 1,073 1,146 1,228

% growth 28.8% 22.4% 6.4% 6.8% 7.2%

EBITDA 726 857 907 966 1,033

% growth 22.1% 18.1% 5.8% 6.5% 7.0%


EBT 868 1,060 1,125 1,202 1,290

% growth 27.3% 22.1% 6.2% 6.8% 7.3%

Tax Expenses (204) (265) (281) (301) (323)

Net Income 664 795 844 902 968

% growth 24.4% 19.8% 6.2% 6.8% 7.3%

EPS (IDR) 45 53 57 61 65

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 664 795 844 902 968


Chg. In NWC 144 (170) (5) (16) (73)



Chg. in LT Assets 78 (13) (48) 11 (19)

Chg. in LT Liabs 13 (16) 16 5 1



Chg. in Debt - - - - -

Dividends Paid (432) (537) (643) (682) (729)

Others (226) - - - -


Chg. in Cash (97) (28) 67 110 27

Beginning Cash 903 806 778 845 955

Ending Cash 806 778 845 955 982

(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 311 329 352 374 406


Total CA 1,548 1,604 1,724 1,892 1,997

Fixed Assets 1,553 1,640 1,738 1,846 1,966

Other Non CA 237 249 297 286 306

Total Assets 3,338 3,494 3,759 4,024 4,269

Short Term Debt - - - - -

Trade Payables 189 159 174 188 201

Other CL 179 124 157 184 176

Total CL 368 283 331 372 377

Long Term Debt - - - - -

Other Non CL 67 50 66 71 72


Share & APIC 2,206 2,206 2,206 2,206 2,206

Retained Earnings 755 1,014 1,215 1,434 1,673

Others (59) (59) (59) (59) (59)

Total Equity 2,903 3,161 3,362 3,581 3,820


3,338 3,494 3,759 4,024 4,269

2018 2019E 2020F 2021F 2022F

Profitability

Return on Equity 22.9% 26.2% 25.9% 26.0% 26.2%

Return on Assets 20.4% 23.3% 23.3% 23.2% 23.3%

Gross Margin 51.5% 54.3% 54.0% 54.0% 54.0%


EBITDA Margin 26.3% 28.8% 28.2% 28.0% 27.9%

Net Margin 24.0% 26.7% 26.2% 26.1% 26.1%

Liquidity

Current Ratio (x) 4.2 5.7 5.2 5.1 5.3

Quick Ratio (x) 3.3 4.3 4.0 4.0 4.1

Solvency

Debt to Equity (x) 0.0 0.0 0.0 0.0 0.0

Debt to Assets (x) 0.0 0.0 0.0 0.0 0.0

Interest Cov. (x) N/A N/A N/A N/A N/A

Valuation


Price to Book (x) 7.2 6.6 6.2 5.8 5.5


PT Nippon Indosari Corpindo Tbk.

NEUTRAL

We upgrade our ADD to BUY call on PT Nippon Indosari

Corpindo Tbk (ROTI) with 52-week target price of IDR

1,540. Our TP represents 18.2% potential upside, pegged to 30.2x

PE (-0.5SD from its 5-year historical average PE). We expect ROTI

to extend its robust growth utilizing its newly established plants

(Gresik and Balikpapan) and 2 additional new plants in 2020, along

with further GT channel enhancement. Profitability improvement

will as well be visible on better operating efficiency. All things

considered, ROTI’s valuation at 25.6x forward PE is justified.

Downside risks are weak volume and delay in opex efficiency.

Robust top-line growth to persist in 2020. ROTI is one among

the other staples that was able to book an impressive volume

growth in 2019. In 2020, ROTI plans to add another 2 new facilities

located in Banjarmasin and Pekanbaru with the idea to cater the

demand from previously unreachable areas, especially in

Kalimantan and Sumatra regions. Coupled with the continuing GT

channel enhancement, we believe the other round of robust volume

growth should be reachable next year. ROTI will also adjust ASP by

5% in 2020, which have been gradually done ~3% on selective

products since Sep-19. Consequently, we foresee ROTI’s top-line

reaching IDR 3.9tn (+18.3% YoY) next year.

More room for OPM improvement. On the back of the

supportive flour price, ROTI saw a record high GPM of 55.5% in

9M19 (vs average of 49.6% for FY10-18). Although GPM is unlikely

to expand further and may normalize on potential rising wheat

price onwards, however ROTI may still be able to improve its

profitability through operating efficiency, one of which is

normalizing marketing activities. To add, savings will come from

logistic costs as it currently supplies the demand in Kalimantan

through its latest and forthcoming Kalimantan plants (previously

from Java’s plants). As a result, we forecast ROTI’s OPM improving

to 11.3% in FY20F, leading to net profit of IDR 334bn (+20.5%

YoY, 8.5% NPM).

Valuation. ROTI trades at 25.6x forward PE which actually is not

undemanding. However, we believe it is justified by ROTI’s strong

top-line generation and potential further margin expansion.

78

Stock Information

Bloomberg Ticker ROTI IJ

52-Week High 1,395

52-Week Low 1,165

FY20F P/E 30.2x

FY20F P/BV 2.8x




Current Price 1,305


% Change 18.2%


Revenue 2,767 3,322 3,929 4,408 4,834

% growth 11.1% 20.1% 18.3% 12.2% 9.7%

Gross Profit 1,492 1,846 2,160 2,411 2,630

Net Profit 173 278 335 384 420

% growth 18.3% 61.0% 20.5% 14.7% 9.4%

Gross Margin (%) 53.9% 55.6% 55.0% 54.7% 54.4%

Net Margin (%) 6.2% 8.4% 8.5% 8.7% 8.7%

Return on Equity (%) 5.9% 8.9% 9.9% 10.5% 10.7%

Return on Assets (%) 3.9% 5.9% 7.3% 7.7% 7.9%

EPS (IDR) 28 45 51 60 66

79


Balance Sheet Ratio Analysis and Key Assumptions

Consumer Staples | Nippon Indosari Corpindo

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 2,767 3,322 3,929 4,408 4,834

% growth 11.1% 20.1% 18.3% 12.2% 9.7%

COGS (1,274) (1,476) (1,768) (1,998) (2,203)

% growth 7.7% 15.8% 19.8% 13.0% 10.3%

Gross Profit 1,492 1,846 2,160 2,411 2,630

% growth 14.1% 23.7% 17.0% 11.6% 9.1%


Opex to Sales (%) -48.9% -46.3% -45.1% -44.3% -44.0%

Other Inc (Exp) 56 54 55 62 70

EBIT 194 362 445 519 572

% growth -24.4% 86.2% 22.9% 16.6% 10.2%

EBITDA 335 548 647 734 799

% growth -11.5% 63.7% 18.2% 13.3% 8.9%

Net Financing (15) (8) 6 14 11

EBT 180 354 451 533 583

% growth 0.4% 89.5% 27.4% 18.1% 9.4%

Tax Expenses (60) (106) (135) (160) (175)

Net Income 173 278 335 384 420

% growth 18.3% 61.0% 20.5% 14.7% 9.4%

EPS (IDR) 28 45 51 60 66

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 173 278 335 384 420


Chg. In NWC (81) 73 28 3 (1)



Chg. in LT Assets (49) (46) (70) (46) (47)

Others (16) (30) (19) (11) (12)



Chg. in Debt (370) - (499) - -

Dividends Paid (36) (52) (83) (100) (154)

Others (38) 16 23 24 26


Chg. in Cash (602) (145) (464) 194 231

Beginning Cash 1,895 1,295 1,151 686 880

Ending Cash 1,293 1,150 686 880 1,111

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalents 1,295 1,151 686 880 1,111


Inventories 65 70 82 93 103


Total CA 1,876 1,698 1,333 1,606 1,909

Fixed Assets 2,222 2,636 2,834 2,906 2,920

Other Non CA 295 341 411 457 504

Total Assets 4,394 4,676 4,578 4,969 5,333

ST Loan 41 41 41 41 41

Trade Payables 395 392 509 553 622

Other CL 89 131 141 180 182

Total CL 525 564 691 774 845

LT Debt 706 706 207 207 207

Other Non CL 246 269 292 316 343


Share & APIC 1,583 1,583 1,583 1,583 1,583


Others (3) (2) (2) (2) (2)

Total Equity 2,917 3,136 3,388 3,672 3,938


4,394 4,676 4,578 4,969 5,333

2018 2019E 2020F 2021F 2022F

Profitability

Gross Margin 53.9% 55.6% 55.0% 54.7% 54.4%


EBITDA Margin 12.1% 16.5% 16.5% 16.6% 16.5%

Net Margin 6.2% 8.4% 8.5% 8.7% 8.7%

Liquidity

Current Ratio (x) 3.6 3.0 1.9 2.1 2.3

Quick Ratio (x) 3.3 2.8 1.7 1.8 2.0

Solvency

Debt to Equity (x) 0.3 0.2 0.1 0.1 0.1

Debt to Assets (x) 0.2 0.2 0.1 0.0 0.0

Interest Cov. (x) 2.4 5.7 17.2 38.6 42.5

Valuation


Price to Book (x) 3.3 2.6 2.8 2.6 2.4

Key assumptions

Volume Growth (Est) 9.1% 12.0% 12.0% 10.0% 7.5%

ASP Growth (Est) 1.0% 1.0% 5.0% 2.0% 2.0%

Sales Return Rate 17.6% 12.5% 12.0% 12.0% 12.0%


PT Unicharm Indonesia Tbk.

BUY

We initiate our coverage on PT Unicharm Indonesia Tbk.

(UCID) with a BUY recommendation and target price of IDR

1,900, implying 17.8x FY20F P/E. Began operating in 1997,

UCID managed to establish a nationwide existence and strong

brand equity that led to company’s dominance in all diaper

categories: MamyPoko in baby care, Charm in feminine care, and

LiFree in adult care. Leveraging on company’s synergy with UC

Japan, UCID benefits from a low R&D cost while enjoying parent’s

innovation capabilities and know-how. We believe that would

enable company to maintain its leading position, ride the wave of

growing diaper industry, and ultimately meet its premiumization

strategy. Risks to our call: intensifying competition, Rupiah

depreciation, and dependency on third party distributors.

Premiumization and product mix lead to improving

profitability. UCID is currently focusing to capture opportunities

arising from expanding middle income class by promoting higher

usage of premium products, mainly targeted on feminine care. The

company sees increasing women’s need for comfort as the main

idea to encourage the thinner and night time napkin usage, that

also provides company with higher margins. At the same time,

adult healthcare that provides lucrative margin is also expected to

grow rapidly in the next few years due to the early adoption stage.

The combination of premiumization and product mix should lead to

better profitability ahead. We forecast company’s GPM to expand

from 25.3% in FY18 to 26.3% in FY21F, while NPM improved from

2.2% in FY18 to 5.5% FY21F. In-line, ROE would also rise from

6.7% as of FY18 to 11.0% in FY21F.

Healthy balance sheet and strong FCF generation. UCID owns

a strong balance sheet, as seen from its manageable leverage and

high cash level. Based on our estimate, we see the company to

turn net cash in FY19E as we forecast DER to decline from 0.8x in

FY18 to 0.4x in FY19E and cash from IPO proceeds booked. In

addition to minimum working capital required, company has passed

its heavy capex cycle, thus providing high FCF. However, we expect

a jump in capex in the next two years as it plans to utilize IPO

proceeds to increase capacity for night time feminine napkin and

adult diaper, which are part of company’s area of focus.

80

Stock Information

Bloomberg Ticker UCID IJ

52-Week High N/A

52-Week Low N/A

FY20F P/E 17.8x

FY20F P/BV 1.6x



Current Price 1,500


% Change 26.7%


Net Revenue 8,351 8,749 9,454 10,172 10,794

% growth 14.7% 4.8% 8.1% 7.6% 6.1%

Gross Profit 2,110 2,205 2,459 2,673 2,826

Net Profit 181 300 443 557 617

% growth 64.5% 65.6% 47.6% 25.7% 10.7%

Gross Margin (%) 25.3% 25.2% 26.0% 26.3% 26.2%

Net Margin (%) 2.2% 3.4% 4.7% 5.5% 5.7%

Return on Equity (%) 6.7% 8.3% 9.6% 11.0% 11.1%

Return on Assets (%) 2.5% 3.8% 5.0% 6.5% 7.3%

EPS 44 72 107 134 148

81



Consumer Staples | Unicharm Indonesia

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Revenue 8,351 8,749 9,454 10,172 10,794

% growth 14.7% 4.8% 8.1% 7.6% 6.1%

COGS (6,241) (6,544) (6,995) (7,499) (7,968)

Gross Profit 2,110 2,205 2,459 2,673 2,826

% growth 11.4% 4.5% 11.6% 8.7% 5.7%


Opex to Sales 19.2% 20.0% 18.6% 18.8% 18.7%

Operating Profit 503 453 698 763 808

% growth 64.6% -10.0% 54.2% 9.2% 5.9%

EBITDA 819 770 1,037 1,112 1,162

% growth 20.4% -6.0% 34.6% 7.3% 4.5%

Net Financing (24) (8) 10 51 43

Other Expenses (189) (17) (118) (71) (29)

Profit Before Tax 290 429 591 743 822

Tax Expense (109) (129) (148) (186) (205)

Tax Rate 37.5% 30.0% 25.0% 25.0% 25.0%

Net Income 181 300 443 557 617

% growth 64.5% 65.6% 47.6% 25.7% 10.7%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 181 300 443 557 617

Depreciation 316 317 338 350 354

Chg. in NWC 128 106 58 74 70




Chg in LT Liabilities (6) 8 7 9 9


Chg. in Share & APIC - 1,330 - - -

Chg. in Debt (329) (246) (243) (1,506) (61)

Dividends Paid (18) - 60 89 111

Others (0.1) - - - -

CF from Financing (311) 1,084 (303) (1,595) (172)

Change in Cash 29 1,554 70 (946) 654

Beginning Cash 1,111 1,140 2,694 2,764 1,818

Ending Cash 1,140 2,694 2,764 1,818 2,472

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash 1,140 2,694 2,764 1,818 2,472


Inventories 724 713 759 819 875

Total Current Assets 4,145 5,915 6,185 5,496 6,394

Fixed Assets 2,941 2,649 2,661 2,495 2,214

Other Non CA 94 118 125 135 144

Total Assets 7,180 8,681 8,971 8,126 8,752

Trade Payables 932 966 1,028 1,109 1,184

Loans 295 48 48 43 13

Total CL 2,394 2,256 2,398 2,577 2,721

Intercompany Loan 1,884 1,886 1,642 141 110

Other Non-CL 104 112 119 128 137


Share & APIC 324 1,654 1,654 1,654 1,654


Minority Interest 0.2 0.2 0.2 0.2 0.2

Other Equity 11.5 11.5 11.5 11.5 11.5

Total Equity 2,798 4,428 4,811 5,279 5,784

2018 2019E 2020F 2021F 2022F

Profitability

ROE 6.7% 8.3% 9.6% 11.0% 11.1%

ROA 2.5% 3.8% 5.0% 6.5% 7.3%

Gross Margin 25.3% 25.2% 26.0% 26.3% 26.2%


EBITDA Margin 9.8% 8.8% 11.0% 10.9% 10.8%

Net Margin 2.2% 3.4% 4.7% 5.5% 5.7%

Liquidity

Current Ratio 1.7 2.6 2.6 2.1 2.4

Quick Ratio 1.2 2.1 2.0 1.6 1.8

Solvency

Debt to Equity Ratio 0.8 0.4 0.4 0.0 0.0

Debt to Asset Ratio 0.3 0.2 0.2 0.0 0.0


Net Debt to EBITDA 1.3 -1.0 -1.0 -1.5 -2.0

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Media Sector

Transforming to Digital

NEUTRAL

Normalizing audience shares. Following a high base

in FY18, SCMA’s prime time audience shares fell by

350bps to date, but are still higher by 420bps than that

of in FY17. The robust achievement in prime time was

driven by the company’s strong presence in drama

series (e.g. Samudra Cinta, Cinta Anak Muda, and Anak

Langit). On the flip side, MNCN’s prime time shares

increased by 250bps to date from FY18 and relatively

stable compared to FY17. One of its drama series,

Tukang Ojek Pengkolan, has received an award as the

best drama series in FY19.

Transformation to digital. Given the strong growth

of the internet and/or other online advertisements,

media companies are forced to tap into digital business

in order to offset the shifting trend. While the two

companies under our coverage have one of its own

(MNCN: RCTI+, SCMA: Vidio), the two digital platforms

have an exact opposite business model. RCTI+,

leveraging MNC Group’s vast contents, serves as the

extension of company’s FTAs, while also offering an

advertising video on demand (AVOD) concept. This will

be an added value for MNCN’s consolidated

performance given that the cost embedded in the

contents have been incurred as company uses its own

library. On the flip side, Vidio runs a subscription based

business model as it charges monthly subscription fee

of IDR 12.9k-50k. From the contents perspective, Vidio

requires a bigger capital compared to RCTI+ as

contents provided are original contents. We view

subscription based business model can be prospective

in the long run once MAU reaches a certain scale.

FY19 in a nutshell. Overall media industry indicated

slowdown in FTA business remains as it online platform

dominates ad spend. Media companies under our

coverage: MNCN and SCMA recorded a soft top-line

growth for TV advertisements where MNCN booked a

5.3% YoY increase while SCMA posted a 3.7% YoY hike

as of 9M19. For TV advertisements, we see a lack of

growth drivers in FY19 compared to FY18 given the

absence of Asian Games and FIFA World Cup.

Meanwhile, consolidated revenue grew by 13.4% YoY

for MNCN and 4.0% YoY for SCMA. Disparity in the top-

line growth was primarily engineered by the existence

of digital business and contents in which MNCN benefits

as an early mover. Moreover, MNCN booked 68.3% YoY

hike on NPAT while SCMA recorded 16.6% YoY decline

on NPAT. SCMA’s sluggish bottom-line figure was due

to the consolidation of its digital business (Vidio).

90

Soft TV advertisement growth

Source: Company data, Sinarmas Investment Research

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2014 2015 2016 2017 2018 9M18 9M19

SCMA MNCN

+5.3%

+3.7%

Media | Sector Outlook

adoption of digital business, 2) Negative earnings

contribution from Vidio, and 3) MSCI exclusion in Nov-

19. Onwards, we expect diminishing pressure from

Vidio to SCMA’s bottom-line will uplift the company’s

valuation as premium to MNCN is at 3-years low.

We reiterate our NEUTRAL call on the sector with

SCMA as our top pick (ADD, FY20 TP: 1,650),

while maintaining our neutral stance on MNCN

(NEUTRAL, FY20 TP: 1,650). We prefer SCMA over

MNCN as we believe, aside from undemanding

valuation, positive catalysts ahead derived from better

visibility on rate cards and steady top-line growth with

reduced cost pressure from digital will provide

attractive risk-reward. Our 52-week TP for SCMA

assumes 4.5% FY20F EPS growth with 16.8x FY20F P/E

(-1.0 SD). Be that as it may, upside risks for our sector

call and valuation may come from the rate card hike

should the collaboration works as intended.

Collaboration between MNCN and SCMA. Heading

into 2020, MNCN and SCMA have signed an MoU for

future collaboration for contents production in OTT and

movies. According to our latest discussion with the

management, one of the most immediate impacts on

this collaboration is from the cost/capex side as the two

companies can share the capital needed to produce

contents. While same content may be displayed in both

platforms, management views a greater value accretion

due to the large market size for OTT. This collaboration

is expected to materialize sooner than later as both

companies are eager to expand in digital business.

Nonetheless, details are still under discussion as this

collaboration opens a wide range of opportunities. This

includes increasing rate cards and shortening A/R cycle

to-and-for advertisers. In addition, both managements

also consider cross-selling non-prime time ads slot and

share swap agreement. All of these are intended to

encourage a healthy competition and environment for

the industry.

Converging trend between the two media players.

We have seen a narrowing gap in valuation between

MNCN and SCMA. At the time of this writing, MNCN is

traded at 11.0 forward P/E, while SCMA is traded at

14.0x forward P/E, implying 44.8% discount vs 81.8%

3-yr average. From the historical perspective, MNCN is

traded at +0.9SD, whereas SCMA is traded at –0.8SD.

We think SCMA’s underperformance was due to 1) Late

91


SCMA ADD 1,445 1,650 14.2 16.0

MNCN NEUTRAL 1,590 1,650 3.8 11.5

Media sector

30.1

35.8

20

25

30

35

40

45

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19

SCMA MNCN

Prime time audience share rating performance


RCTI+ and Vidio platform


0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

200.0%

0

5

10

15

20

25

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19

SCMA PE MNCN PE %Discount Average

Valuation gap are at 3-years low

Source: Bloomberg data, Sinarmas Investment Research

Media Sector

PT Surya Citra Media Tbk.

ADD

We reiterate our ADD call on PT Surya Citra Media Tbk.

(SCMA) with 52-week target price at IDR 1,650 per share.

Our TP provides 14% upside and implies 16.0x FY20F PE (-1.1SD

from 5-years average). SCMA’s share price has declined by 22.7%

YTD (vs JCI +0.1%), underperforming its peer (MNCN) by >150%

YTD. Its PE valuation premium compared to MNCN has narrowed to

its 3-years low at 45%, versus its historical average at 80%.

SCMA’s underperformance (depressed valuation and steep

correction) despite –3% YoY earnings correction provides an

attractive risk/reward, in our view. In addition to its undemanding

valuation, positive catalysts ahead from better visibility on rate

cards and steady top-line growth with a reduced cost pressure from

digital serves additional upsides for the stock. To note, the stock

also offers 5% dividend yield at current price. Downside risks to our

call are lower than expected rate card and higher than expected

cost from digital business.

Consolidation of digital business boost revenue but

pressurize margin. SCMA started to consolidate its digital

businesses (Vidio, Kapanlagi.com, and EYE) in 1H19. Its 1H18

restatement pointed in 4% higher revenue but with 10.3 ppt drop

in NPM as profit dropped by 27%. As of 9M19, digital businesses

contributes to 35% top-line growth YoY (vs consolidated revenue of

4% YoY). EBITDA margin, however, continues to fall, down by 7

ppt to 33.2% in 9M19, as content cost rose by 16% YoY. We expect

digital to continue growing by 20% CAGR in the next 4 years.

Collaboration with MNCN should help ease cost pressure. We

view that SCMA collaboration with MNCN should ease costs of

content production for Vidio, as both companies intend to jointly

produce more local contents for their OTT platforms and movie

titles. This should translate to a lower content cost and capex for

SCMA’s digital business. High digital content costs have been a

burden on SCMA’s bottom line, as the company has been investing

a lot in content programming to promote streaming platform Vidio.

Valuation. Our target price of IDR 1,650 is derived via PE

multiples at 16.0x (-1.1SD from its 5 years average). SCMA is

currently trading at 14.0x FY20F PE.

92

Stock Information

Bloomberg Ticker SCMA IJ

52-Week High 2,030

52-Week Low 1,080

FY20F P/E 16.0x

FY20F P/BV 4.4x




Current Price 1,445


% Change 14.2%


Revenue 5,002 5,475 5,730 6,000 6,287

% growth 12.3% 9.5% 4.7% 4.7% 4.8%

EBITDA 2,132 2,028 2,109 2,190 2,274

Net Profit 1,485 1,442 1,507 1,577 1,647

% growth 11.5% -2.9% 4.5% 4.6% 4.4%

EBITDA Margin (%) 42.6% 37.0% 36.8% 36.5% 36.2%

Net Margin (%) 29.7% 26.3% 26.3% 26.3% 26.2%

Return on Equity (%) 29.1% 25.7% 24.6% 23.7% 22.9%

Return on Assets (%) 24.2% 21.4% 20.6% 20.0% 19.4%

EPS (IDR) 102 99 103 108 113

93



Media | Surya Citra Media

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & equivalents 830 1,260 1,725 2,218 2,726

Trade receivables 1,555 1,728 1,798 1,866 1,914

Other CA 1,042 1,134 1,179 1,224 1,269

Total CA 3,427 4,122 4,702 5,308 5,909

PPE 1,050 1,071 1,089 1,103 1,113

Other LT assets 1,662 1,555 1,520 1,487 1,458

Total Assets 6,138 6,748 7,311 7,898 8,480

Payables 486 544 586 627 639

Short-term loans 16 12 10 10 10

Others 301 344 361 377 393

Total CL 804 901 957 1,015 1,043

Long term liabilities 231 231 231 231 231


Share & APIC 1,010 1,010 1,010 1,010 1,010

Retained earnings 3,552 3,985 4,437 4,910 5,404

NCI 531 602 656 713 772

Other 10 20 20 20 20

Total Equity 5,103 5,616 6,123 6,653 7,206


6,138 6,748 7,311 7,898 8,480

2018 2019E 2020F 2021F 2022F

Profitability

ROE 29.1% 25.7% 24.6% 23.7% 22.9%

ROA 24.2% 21.4% 20.6% 20.0% 19.4%

EBITDA Margin 42.6% 37.0% 36.8% 36.5% 36.2%

Net profit margin 29.7% 26.3% 26.3% 26.3% 26.2%


Current Ratio 4.3 4.6 4.9 5.2 5.7

Debt to Equity 0.0 0.0 0.0 0.0 0.0

Debt to Assets 0.0 0.0 0.0 0.0 0.0

Valuation


Price to Book (PBV) 5.3 4.8 4.4 4.1 3.7

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 5,002 5,475 5,730 6,000 6,287

Prog. & broadcasting (2,157) (2,521) (2,646) (2,784) (2,938)

Operating exp (906) (1,019) (1,071) (1,122) (1,170)

Other income/exp (1) (20) (21) (24) (29)


EBITDA 2,132 2,028 2,109 2,190 2,274

Profit/loss from JV 9 - - - -

Finance income(exp) 22 39 53 68 83

EBT 1,969 1,953 2,045 2,137 2,233

Tax (494) (497) (523) (544) (569)

NCI 10 (15) (15) (16) (17)

Net profit 1,485 1,442 1,507 1,577 1,647

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 1,485 1,442 1,507 1,577 1,647

Depreciation 185 113 117 121 124

Chg. in NWC 13 164 57 55 65



Chg. in LT Assets 61 (60) 12 15 17

Chg in LT Liabilities (4) - - - -



Chg. in Bank Loans (50) (5) (2) - -

Dividends Paid 804 1,010 1,055 1,104 1,153

Others 17 81 54 57 59

CF from Financing (837) (934) (1,003) (1,047) (1,093)

Change in Cash 596 430 465 493 508

Beginning Cash 234 830 1,260 1,725 2,218

Ending Cash 830 1,260 1,725 2,218 2,726

Media Sector

PT Media Nusantara Citra Tbk.

NEUTRAL

We maintain our NEUTRAL recommendation on PT Media

Nusantara Citra Tbk. (MNCN) with 52-week target price of

IDR 1,650 per share, implying 11.5x FY20F P/E (-0.3SD

from 5-years average). Our neutral rating is on the back of the

company’s demanding valuation since the share price has rallied by

140% YTD, leading to a valuation gap with SCMA to 3-years low at

45% (vs historical avg. of 80%). In addition to that, we expect

digital business to grow at a calmer rate while FTA business to

grow by mid-to-low single digit. Upside risks to our call are

significant hike in rate card and robust performance from digital

business.

Normalizing growth from digital business. Being a content

king in Indonesia’s mass market media industry, MNCN managed to

capture the growing opportunities from digital media business by

launching its own streaming platform: RCTI+ in 2H19 while also

monetizing from its contents uploaded on the company’s YouTube

channels. Growing from a low base, MNCN’s digital business has

been growing by an exponential rate and we estimate the

segment’s contribution reaching 8% in FY19E. Nevertheless, we

expect the growth momentum to decelerate in the coming years on

the back of a high base growth reading as well as rising

competition from both local and foreign OTT players such as Vidio,

HOOQ, Viu, MAXstream, Iflix, Viu, and Netflix.

Venturing into a healthier industry outlook through

collaboration. As MNCN and SCMA have announced partnership to

jointly work on contents production for OTT and movies, we expect

MNCN to have a wider range of contents library while bearing a

minimum cost and risk level. The management also expects rate

card to increase by a total of 25% in FY20F, or specifically 10% in

1Q20 and another 15% prior to Lebaran period. However, we have

yet to take into account the aggressive rate card adjustment in our

FY20F forecast as we view that the feasibility of prior mentioned

plans highly depends on various factors including competitor’s

strategy, ads demand, and company’s audience share performance.

94

Stock Information

Bloomberg Ticker MNCN IJ

52-Week High 1,705

52-Week Low 675

FY20F P/E 11.5x

FY20F P/BV 1.7x




Current Price 1,590


% Change 3.8%


Revenue 7,444 8,267 8,604 8,933 9,246

% growth 5.5% 11.1% 6.0% 3.8% 3.5%

EBITDA 3,177 3,378 3,441 3,513 3,586

Net Profit 1,531 1,999 2,056 2,143 2,244

% growth 5.4% 30.5% 2.8% 4.3% 4.7%

EBITDA Margin (%) 42.7% 40.9% 40.0% 39.3% 38.8%

Net Margin (%) 20.6% 24.2% 23.9% 24.0% 24.3%

Return on Equity (%) 13.9% 16.3% 15.1% 14.3% 13.7%

Return on Assets (%) 9.3% 11.3% 11.0% 10.9% 11.0%

EPS (IDR) 107 140 144 150 157

95



Media | Media Nusantara Citra

(IDR Bn) 2018 2019E 2020F 2021F 2022F



Other CA 3,572 3,909 4,073 4,221 4,371

Total CA 7,804 8,600 9,328 10,053 10,648

PPE 5,778 6,131 6,440 6,704 6,926

Other LT assets 2,938 2,897 2,855 2,846 2,835

Total Assets 16,520 17,629 18,623 19,603 20,409

Payables 805 908 929 1,021 1,049

Short-term loans 549 554 726 913 1,767

Others 292 349 358 378 397

Total CL 1,646 1,811 2,013 2,311 3,214

Long term loans 3,445 3,056 2,497 1,769 194

Other long term liabil- 446 477 511 549 590


Share & APIC 4,503 4,503 4,503 4,503 4,503


NCI 884 966 1,050 1,137 1,229

Other (2,945) (2,925) (2,925) (2,925) (2,925)

Total Equity 11,077 12,379 13,696 15,069 16,507


16,615 17,723 18,717 19,698 20,504

2018 2019E 2020F 2021F 2022F

Profitability

ROE 13.9% 16.3% 15.1% 14.3% 13.7%

ROA 9.3% 11.3% 11.0% 10.9% 11.0%

EBITDA Margin 42.7% 40.9% 40.0% 39.3% 38.8%


Liquidity

Current Ratio 0.2 0.2 0.2 0.2 0.3

Solvency

Debt to Equity 0.3 0.3 0.2 0.2 0.1

Debt to Assets 0.2 0.2 0.2 0.1 0.1

Valuation


Price to Book (PBV) 2.1 1.9 1.7 1.6 1.4

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 7,444 8,267 8,604 8,933 9,246

Prog. & broadcasting (2,643) (2,815) (2,984) (3,133) (3,258)

Dep and Amor exp (182) (194) (205) (216) (224)

Gross Profit 4,619 5,259 5,414 5,584 5,763

G&A (1,879) (2,075) (2,178) (2,287) (2,402)


Other income/exp (313) 57 0 0 0

EBIT 2,427 3,241 3,236 3,297 3,362

EBITDA 3,177 3,378 3,441 3,513 3,586

Finance income(exp) (323) (366) (280) (215) (135)

EBT 2,104 2,875 2,956 3,082 3,227

Tax (498) (719) (739) (771) (807)

NCI (74) (157) (162) (168) (176)

Net profit 1,531 1,999 2,056 2,143 2,244

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 1,531 1,999 2,056 2,143 2,244

Depreciation & amor- 437 477 505 535 578

Chg. in NWC (447) (573) (227) (185) (240)



Chg. in LT Assets 39 (14) 2 (19) (17)




Chg. in Bank Loans 310 (384) (387) (541) (721)

Dividends Paid (214) (800) (822) (857) (897)

Others (515) 102 84 87 91

CF from Financing (40) (1,081) (1,126) (1,311) (1,527)

Change in Cash 704 62 470 429 307

Beginning Cash 469 1,173 1,236 1,706 2,135

Ending Cash 1,173 1,236 1,706 2,135 2,443

Metal Sector

Improving Balance

NEUTRAL

What do we expect in FY20? Despite recent

weakness, we forecast nickel price to rebound in FY20

as we see the current inventory remains low while

demand will still grow modestly paired with a moderate

supply growth as higher refined output will be strained

by lower ore availability from Indonesia’s ore export

ban. Wood Mackenzie forecasts demand to grow by

3.8% YoY in FY20, slowing down from 6.3% in FY19.

Stainless steel and EV batteries remain to be the

engine drivers for nickel consumption growth. On the

other hand, refined nickel output is forecasted to grow

by 5.3% in FY20, declining from 8.3% in FY19. Nickel

mined production, however, is expected to drop by 3%

YoY. These should level out the demand/supply balance

in FY20, after posting a supply deficit in the past 4

years. We forecast nickel price to average at USD

15,000 per ton in FY20, rising from USD 14,000 per ton

average in FY19.

FY19 in a nutshell. After recent outperformance in

3Q19 boosted by the changes in Indonesia ore export

ban regulation, nickel stocks dived in recent months as

nickel price pulled back to USD 13,000 per ton from its

highest level at USD 18,050 in Sep-19. Recent nickel

fallout was driven by weakness in the stainless steel

and EV sales department. Stainless steel price has

dropped by 11.4% from its peak in FY19 due to a

lackluster demand and an increase in raw material

cost. Meanwhile, EV sales in China plummeted following

Chinese government’s decision to cut subsidy in Jun-

19. On the other hand, we see supplies flooding due to

ramping up of ore export coming from Indonesia prior

to the export ban deadline (Jan-20). We saw a

significant jump in Indonesia ore export to 5.9 wmt in

Oct-19 (+200% YoY, +50.9% MoM). Most of them

were absorbed by Chinese players, shown by their

recent jump in ore inventory (+9.1% YoY).

96


Metal sector vs JCI


Nickel demand/surplus balance

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19

JCI Index Nickel Stocks LME Price

(40,000)

(30,000)

(20,000)

(10,000)

-

10,000

20,000

30,000

40,000

50,000

-

50,000

100,000

150,000

200,000

250,000

Apr-

01

Aug-0

1

Dec-0

1

Apr-

02

Aug-0

2

Dec-0

2

Apr-

03

Aug-0

3

Dec-0

3

Apr-

04

Aug-0

4

Dec-0

4

Apr-

05

Aug-0

5

Dec-0

5

Apr-

06

Aug-0

6

Dec-0

6

Apr-

07

Aug-0

7

Dec-0

7

Apr-

08

Aug-0

8

Dec-0

8

Apr-

09

Aug-0

9

Dec-0

9

Apr-

10

Aug-1

0

Dec-1

0

Apr-

11

Aug-1

1

Dec-1

1

Apr-

12

Aug-1

2

Dec-1

2

Apr-

13

Aug-1

3

Dec-1

3

Apr-

14

Aug-1

4

Dec-1

4

Apr-

15

Aug-1

5

Dec-1

5

Apr-

16

Aug-1

6

Dec-1

6

Apr-

17

Aug-1

7

Dec-1

7

Apr-

18

Aug-1

8

Dec-1

8

Apr-

19

Aug-1

9

Surplus/Deficit Global Nickel Demand (Ton) Global Nickel Production (Ton)

Metal | Sector Outlook

Steady nickel demand growth. Global demand for

nickel is expected to grow steadily by 3% CAGR in the

next 5 years. Stainless steel and EV batteries will

remain as the engine drivers for growth. Stainless

steel, currently representing 68% of total nickel

demand, is expected to grow by 3.7% in FY20. Despite

recent weakness, Chinese government’s stimulus to

boost the economy through infrastructure projects

should help improving the demand. We should see a

modest recovery in the latter half of 2020, post

Chinese holiday season. This should level out the

demand/supply balance for FY20.

We downgrade our rating to NEUTRAL on metal

sector, despite potential price rebound, as we see

current share price offers limited upside potentials.

Using our long term (LT) nickel price assumption at

USD 16k per ton, our DCF-based valuation arrived at a

fair price of IDR 3,700 and IDR 970 per share

respectively for INCO and ANTM, which offers a limited

upside from current market price. As a result, we have

an ADD call for ANTM (14% upside) and NEUTRAL

rating for INCO (6% upside). Upside risks to our call

are higher than expected nickel price, unexpected

supply disruption and lower than expected inventory.

Indonesia brings forward nickel ore export ban.

Nickel price had rallied in Sep-19, reaching its peak of

USD 18,050 after the announcement that Indonesia will

bring forward its nickel ore export ban regulation from

2022 to the beginning of 2020. This was intended to

promote the development of value added products for

refined nickel output. To illustrate the impacts of such

regulation, as of 10M19, Indonesia has exported 26.6

mn wmt of nickel ore, this is equivalent to ~270k ton

of refined nickel which is around 11% of global refined

nickel demand. Due to fear of shortage supply, traders

have been stocking up nickel, causing the price to

shoot up. However, prior to the deadline, Indo ore

miners have been ramping up their export. In oct-19,

ore export jumped significantly to 5.9 wmt (+200%

YoY, +50.9% MoM).

Nickel supply dynamics. Wood Mackenzie expects

nickel mined production to decline by 3% YoY while

refined production to rise by 5.3% YoY in FY20. Global

mined nickel production is set to drop due to

Indonesia’s ore export ban, while the acceleration of

Indonesia’s smelter projects should boost refined

output. Wood Mackenzie also expect refined production

to remain flat in FY21 due to reduction in Chinese NPI

output resulting from lower ore availability from

Indonesia. This should help offset potential NPI

increase from Indonesia, primarily coming from further

expansion from Tsingshan Morowali and Virtue Dragon.

97


Indonesia ore export jump in Oct-19


INCO NEUTRAL 3,490 3,700 6.0 28.5

ANTM ADD 850 970 14.1 24.6

Metal sector

Source: Wood Mackenzie, Sinarmas Investment Research

Indonesia rising refined nickel output

Global refined nickel supply-demand balance (kt)

2018 2019 2020 2021

Refined production capability 2103 2233 2421 2593

Forecast disruption allowance -4 -52 -52

Base case refined output 2233 2417 2542 2533

Forecast market adjusment 1 5 13

Actual/forecast refined output 2233 2418 2547 2546

Consumption 2300 2445 2538 2617

Balance -68 -26 8 -70

Source: Wood Mackenzie, Sinarmas Investment Research

Global refined nickel supply-demand balance (kt)

0

500

1000

1500

2000

2500

3000

2015 2016 2017 2018 2019 2020 2021

China Indonesia Japan Oceania Others

-50.00

0.00

50.00

100.00

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-2.00

0.00

2.00

4.00

6.00

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10.00

Jan-1

2

Apr-

12

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Oct

-12

Jan-1

3

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-13

Jan-1

4

Apr-

14

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14

Oct

-14

Jan-1

5

Apr-

15

Jul-

15

Oct

-15

Jan-1

6

Apr-

16

Jul-

16

Oct

-16

Jan-1

7

Apr-

17

Jul-

17

Oct

-17

Jan-1

8

Apr-

18

Jul-

18

Oct

-18

Jan-1

9

Apr-

19

Jul-

19

Oct

-19

Nickel Ore (mn wmt) Ferronickel (mn Mt)

Metal Sector

PT Vale Indonesia Tbk.

NEUTRAL

We downgrade our recommendation from ADD to NEUTRAL

on PT Vale Indonesia Tbk. (INCO) with 52-week target price

of IDR 3,700. Our TP provides 6% upside potential and implies

28.5x FY20F PE and 1.3x FY20F PBV. Though we remain positive on

LT nickel price, we see limited upside for the stock due to recent

share price rally. We expect nickel price to average at USD 15k per

ton in FY20 which will bring INCO’s earnings to USD 94 mn,

doubled the profit that we have estimated for FY19E. Upside risks

to our call are higher than expected nickel price, lower than

expected cash cost and better than expected global economic data.

Still the best proxy for nickel recovery. Being a pure nickel

player in the industry, INCO is one of the best proxies and

beneficiaries of rising nickel price. In addition, since INCO only sells

refined nickel (nickel matte), they are not impacted by the recent

Indonesia’s regulation on export ore ban. Using our base case

scenario of LME nickel price at USD 15k, we forecast INCO to book

an earnings of USD 94 mn in FY20. Accordingly, ROE will also

improve from 2.1% in FY19E to 4.6% in FY20F. On another note,

our sensitivity analyst suggest that every 1% increase in nickel

price will raise INCO’s earnings by 4.5%.

Update on stake divestment. After months of overhang in

INCO’s 20% stake divestment, local news have reported that the

deal agreement is getting closer to completion. Inalum mentioned

that they will be acquiring 20% stake of INCO for USD 500 mn.

This implies a market price of ~IDR 3,600. Official signing of the

conditional sales and purchase agreement is expected to be

completed in end of Dec-19, while the closing transaction will

happen in Jun-20.

Valuation. Our target price of IDR 3,700 per share is derived from

DCF based valuation (11% WACC) throughout its life of mine and

using LT nickel price assumption at USD 16k per ton. Hence, we

see limited upsides on the stock as we believe the market is

currently valuing INCO near our LT nickel price. INCO is currently

trading at 26.8x FY20 forward PE and 1.2x FY20 forward PBV.

98

Stock Information

Bloomberg Ticker INCO IJ

52-Week High 4,320

52-Week Low 2,410

FY20F P/E 28.5x

FY20F P/BV 1.3x




Current Price 3,490


% Change 6.0%


Revenue 777 733 806 958 1,073

% growth 23.4% -5.7% 10.0% 18.9% 12.0%

Gross Profit 104 80 153 243 296

Net Profit 61 40 94 158 196

% growth N/A -34.2% 135.1% 68.3% 24.5%

Gross Margin (%) 13.4% 11.0% 19.0% 25.3% 27.6%

Net Margin (%) 7.8% 5.4% 11.6% 16.4% 18.3%

Return on Equity (%) 3.2% 2.1% 4.6% 7.1% 8.0%

Return on Assets (%) 2.7% 1.8% 3.9% 5.9% 6.6%

EPS (USD) 0.006 0.004 0.009 0.016 0.020

99



Metal | Vale Indonesia

(USD Mn) 2018 2019E 2020F 2021F 2022F

Cash & equivalents 301 405 530 752 1,043

Trade receivables 124 161 177 210 235

Other CA 206 179 197 221 251

Total CA 631 746 904 1,183 1,529

PPE 1,435 1,446 1,375 1,283 1,189

Other LT Assets 137 68 125 197 241

Total Assets 2,202 2,259 2,403 2,663 2,959

Trade payables 91 96 97 106 115

ST loans 37 - - - -

Other CL 48 45 49 59 66

Total CL 175 142 146 164 181

LT loans - - - - -

Other 143 218 240 286 320


Share & APIC 414 414 414 414 414


Total Equity 1,884 1,899 2,016 2,213 2,459


2,202

2,259

2,403

2,663

2,959

2018 2019E 2020F 2021F 2022F

Profitability

ROE 3.2% 2.1% 4.6% 7.1% 8.0%

ROA 2.7% 1.8% 3.9% 5.9% 6.6%

EBITDA Margin 30.0% 28.5% 35.2% 39.1% 39.9%

Gross Margin 13.4% 11.0% 19.0% 25.3% 27.6%



Liquidity

Current Ratio 3.6 5.3 6.2 7.2 8.5

Solvency

Debt to Equity 0.0 0.0 0.0 0.0 0.0

Debt to Assets 0.0 0.0 0.0 0.0 0.0

Valuation


Price to Book (PBV) 0.9 1.4 1.3 1.2 1.0

Key Assumptions

Nickel Price ($/ton)

Nickel matte produc-tion (ton)

74,806

70,018

70,018

77,020

86,263

(USD Mn) 2018 2019E 2020F 2021F 2022F

Revenue 777 733 806 958 1,073

Cost of Revenue 673 652 653 715 778

Gross Profit 104 80 153 243 296

Operating Expense 12 14 15 18 19

Others (3) (12) (12) (12) (11)

EBIT 89 55 127 213 265

EBITDA 233 209 284 374 429

Net Financing (7) 0 - - -

EBT 83 55 127 213 265

Tax 22 15 33 55 69

Net Profit 61 40 94 158 196

(USD Mn) 2018 2019E 2020F 2021F 2022F

Net Income 61 40 94 158 196

Depreciation 94 128 130 132 133

Chg. in NWC 92 (7) (29) (40) (38)



Chg. in LT Assets (43) 69 (57) (72) (44)


CF from Investing (73) (135) 4 (94) (67)


Chg. in ST Loans (0) (37) - - -

Chg. in LT Loans (36) - - - -

Dividends Paid (30) 10 23 39 49

CF from Financing (67) (27) 23 39 49

Beginning Cash 222 267 405 530 752

Change in Cash 45 138 125 221 291

Ending Cash 267 405 530 752 1,043

Metal Sector

PT Aneka Tambang Tbk.

ADD

We tone down our recommendation on PT Aneka Tambang

Tbk (ANTM) from BUY to ADD with 52-week target price of

IDR 970. Our TP provides 14% upside and implies 24.6x FY20F PE

and 1.2x FY20F PBV (10-years average). We slightly tone down our

rating as we adjust our earnings following Indonesia’s regulation on

ore export ban. Despite ore export ban, we believe rising nickel

price and higher ferronickel output from the Halmahera plant

expansion could fully offset earnings loss from the ban. We forecast

earnings to expand by 20% next year, supported by higher margin

from the nickel business and higher output from the bauxite

divisions. Downside risks to our call are lower than expected

commodity price (nickel, gold and bauxite) and lower than

expected production output.

Dissecting the impact of export ore ban. In the nickel

segments, ANTM sells ferronickel (20% Ni content) as well as nickel

ore. For the ore, ANTM is likely to sell around ~8 mn wmt of ore

this year, in which half of it (~4 mn wmt) are exported. This will

translate to a potential revenue loss of ~IDR 1.7 tn (4.8% of total

revenue). We forecast nickel-segments revenue to decline slightly

by 6.6% in FY20 (ore sales down by 47.9% YoY but ferronickel up

by 21.2% YoY) before rising by 19.1% in FY21, as rising nickel

price and higher output from the ferronickel expansion start to

materialize.

Expecting steady increase of ferronickel output. Construction

progress of East Halmahera ferronickel plant project has reached

98% of completion on Sep-19. The company expects production to

begin in 2020. Note that this plant has a total capacity of 13.5k

ton, which will bring a total ferronickel capacity of the company to

40.0k ton (27k ton currently). We expect a production CAGR of

11.2% in the next 4 years. This should provide a decent LT growth

for the company.

Valuation. Our target price of IDR 970 per share is derived from

DCF based valuation (11% WACC) throughout each of the mine life.

ANTM is currently trading at 21.6x FY20 forward PE and 1.0x FY20

forward PBV.

100

Stock Information

Bloomberg Ticker ANTM IJ

52-Week High 1,175

52-Week Low 660

FY20F P/E 24.6x

FY20F P/BV 1.2x




Current Price 850


% Change 14.1%


Revenue 25,241 34,007 35,641 37,587 37,485

% growth 99.5% 34.7% 4.8% 5.5% -0.3%

Gross Profit 3,476 4,663 5,270 6,296 6,361

Net Profit 874 781 947 1,488 1,847

% growth 540.6% -10.7% 21.2% 57.2% 24.2%

Gross Margin (%) 13.8% 13.7% 14.8% 16.8% 17.0%

Net Margin (%) 3.5% 2.3% 2.7% 4.0% 4.9%

Return on Equity (%) 4.4% 4.0% 4.8% 7.4% 9.0%

Return on Assets (%) 2.6% 2.3% 2.8% 4.3% 5.4%

EPS (IDR) 36 32 39 62 77

101



Metal | Aneka Tambang

(IDR Bn) 2018 2019E 2020F 2021F 2022F


Trade receivables 975 1,446 1,515 1,598 1,593

Other CA 3,224 4,177 4,266 4,474 4,440

Total CA 8,498 8,243 9,033 10,871 11,408

PPE 20,128 20,258 19,783 19,144 18,479

Other LT Assets 4,680 4,804 4,529 4,451 4,372

Total Assets 33,306 33,305 33,345 34,466 34,259

Trade payables 1,158 1,786 1,849 1,905 1,895

ST loans 2,600 2,419 4,611 2,669 2,740

Other CL 1,754 2,012 2,102 2,224 2,252

Total CL 5,512 6,217 8,562 6,799 6,887

LT loans 7,348 6,599 4,025 6,507 5,755

Other 708 943 976 1,006 1,001


Share & APIC 6,338 6,338 6,338 6,338 6,338


NCI - - - - -

Other 2,810 2,810 2,810 2,810 2,810

Total Equity 19,739 19,546 19,783 20,155 20,617


33,306

33,305

33,345

34,466

34,259

2018 2019E 2020F 2021F 2022F

Profitability

ROE 4.4% 4.0% 4.8% 7.4% 9.0%

ROA 2.6% 2.3% 2.8% 4.3% 5.4%

EBITDA Margin 9.2% 8.1% 8.9% 10.7% 12.1%

Gross Margin 13.8% 13.7% 14.8% 16.8% 17.0%



Liquidity

Current Ratio 6.0 5.4 3.9 5.1 5.0

Solvency

Debt to Equity 0.5 0.5 0.4 0.5 0.4

Debt to Assets 0.3 0.3 0.3 0.3 0.2

Valuation


Price to Book (PBV) 0.8 1.2 1.2 1.2 1.2

Key Assumptions

Nickel Price ($/ton) 13,186 14,000 15,000 16,000 16,000

Gold Price ($/ounce) 1,269 1,450 1,500 1,500 1,500

Ferronickel Production (Tni)

24,868 25,365 29,170 33,546 36,900

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 25,241 34,007 35,641 37,587 37,485

Cost of Revenue 21,765 29,344 30,370 31,291 31,124

Gross Profit 3,476 4,663 5,270 6,296 6,361

G&A 1,092 1,325 1,446 1,517 1,417

Selling & Marketing 532 1,619 1,768 1,854 1,732

EBIT 1,853 1,719 2,057 2,925 3,213

EBITDA 2,319 2,741 3,176 4,038 4,528

Net Financing (391) (436) (437) (451) (363)

Loss from JV (520) (269) (305) (335) (157)

Other 324 187 143 150 150

EBT 1,266 1,201 1,456 2,289 2,842

Tax 391 420 510 801 995

NCI - - - - -

Net Profit 874 781 947 1,488 1,847

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 874 781 947 1,488 1,847

Depreciation 934 1,231 1,365 1,390 1,415

Amortization 66 61 59 58 57

Chg. in NWC 739 (528) (5) (110) 56


Capital Expenditure (6,970) (1,360) (891) (752) (750)

Chg. in LT Assets 2,173 (185) 216 19 22

Chg in LT Liabilities 34 235 33 30 (5)

CF from Investing (4,762) (1,311) (641) (703) (732)


Chg. in ST Loans (1,528) (190) 2,191 (1,943) 71

Chg. in LT Loans 2,050 (748) (2,575) 2,483 (753)

Dividends Paid (437) (586) (710) (1,116) (1,386)

Others 423 - - - -

CF from Financing 508 (1,524) (1,093) (576) (2,067)

Beginning Cash 5,551 3,911 2,620 3,251 4,799

Change in Cash (1,640) (1,291) 631 1,548 576

Ending Cash 3,911 2,620 3,251 4,799 5,375

Oil and Gas Sector

Calm Waters Ahead

NEUTRAL

What do we expect in FY20? After a strong rally in

FY19, we expect oil price to stabilize at the current

level as wee see market balance to remain unchanged

this year. On the supply side, we see output growth

from US will slow down in FY20 to 0.9 mn bpd, after a

strong output growth in FY19 (1.3 mn bpd). Meanwhile,

recent OPEC decision to further cut their production by

another 500k barrels per day will help to stabilize

market balance from a lackluster demand in FY20.

Weak demand, fueled by US China trade war and fears

of global economic recessions will play a major role in

setting the oil price this year. We expect, demand

indicator to play a larger role than supply in

determining oil price in 2020. EIA estimates that

demand will rise by 1.2 mn bpd in FY20, rising slightly

from an increase of 1.0 mn bpd in FY19. We forecast oil

price to average at USD 60 per barrel in FY20,

compared to USD 57 per barrel in FY19.

Another round of cut for OPEC and allies. In

OPEC’s last meeting in Dec-19, all members including

Russia have agreed to cut production by an additional

of 500,000 bpd by the end of Mar-20 to help push up

oil price. This is equivalent to 0.5% of total global

output and it would bring the total production cut for

OPEC and its allies to 1.7 mn bpd. Potential falling

demand due to global economic slowdown and

increasing global oil supply from US and other

producers outside the cartel are the major reasons for

the deeper cut. If executed, OPEC will produce about

29.4 mn bpd in FY20, which is equivalent to 29% of

global output, down by 4% from a year ago.

FY19 in a nutshell. Oil price has moved in steadily in

2019, settling in at USD 59 per barrel as of Dec-19

(+30% YTD), as OPEC and its allies have been

supportive in maintaining market balance in response

to the rising of US shale oil output and lackluster

demand. Since OPEC’s decision to cut production at the

end of FY18, we have seen major decline in their

output. In Oct-19, OPEC production has fallen to 29.7

mn barrels per day (bpd), down from 33.0 mn bpd in

Nov-18. Saudi Arabia led the decline as output fell by

1.1 mn bpd to 9.9 mn bpd in Oct-19. Meanwhile, US

output has risen from 11.7 mn bpd in Dec-18 to 12.6

mn bpd in Oct-19, driven by rising shale output. On the

other hand, IEA estimate global oil demand recovered

slightly to 101.3 mn bpd in 3Q19 from the low levels of

99.3 mn bpd in 1H19. This figure is slightly higher than

2018’s level at 99.3 mn bpd.

102

14.718.8

10.0

10.9

14.5

14.9

0

10

20

30

40

50

60

70

80

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

US Saudi Arabia Russia Oil Price

Oil production (mn bpd) and price

Source: Bloomberg, IEA, OPEC, Sinarmas Investment Research

Oil and Gas | Sector Outlook

Europe, India, Japan and others. Both IEA and OPEC

now expect demand to remain sluggish in FY20,

recovering slightly from the low base in FY19.

Indonesia: upstream investment activity has

slowly recovered. 2018 marked the first rebound in

Indonesia upstream investment cycle after posting a

consistent decline in the last 4 years (-14.2% CAGR),

growing by 8% YoY in 2018. We believe the current

investment cycle has passed its bottom cycle in 2017,

and we expect a modest recovery in years ahead. Note

that upstream investment could take more than 5

years to give a clear result. Hence, without any further

improvement in the current investment activity, we

could see domestic oil production to fall sharply in the

next few years, while demand will consistently rise at a

moderate growth.

We maintain our NEUTRAL rating on oil and gas

sector, as we expect demand to remain sluggish with

similar market balance as higher output from US

should be partially offset by a lower OPEC output.

Hence, we expect price to trade at similar level next

year at USD 60 per barrel. On stocks names, we have a

BUY rating for ELSA as valuation remains undemanding

at current price, while maintaining an ADD rating for

PGAS. Downside risks to our call are lower than

expected oil price and slower than expected demand

growth.

Compliance of cut from every member will be the main

focus for investors to watch in FY20.

US output seen rising in FY20 but at a slower

pace. US crude oil output hit all time high record of 13

mn bpd in dec-19, 1.3 mn bpd (+11.1% YoY) higher as

compared to a year ago. EIA forecasts US oil output to

rise by another 0.9 mn bpd in FY20, slower than FY18

growth of 1.6 mn bpd and FY19 growth of 1.3 mn bpd.

This should bring US oil production to average at 13.2

mn bpd in FY20, firming their position next year as a

net oil exporter. Despite a slower growth, keep in mind

that an increase of 0.9 mn bpd would almost satisfy

nearly all of the 1.2 mn bpd increase in the world

demand next year. US is currently the largest oil

producing country with an approximately 13% of

market share. Hence, a higher or lower than expected

oil output next year would have huge impact to market

balance, given lackluster demand next year.

Sluggish demand growth outlook. IEA now

forecasts oil demand to grow by 1.0 mn bpd in FY19

and 1.2 mn bpd in FY20, both of which are downward

revision by 100,000 bpd from the previous estimate.

FY19 growth has been the weakest since 2016 as

global economy slowdown, fueled by the prolonged

trade war, has impacted global energy demand,

especially in the major consuming countries such as

103


ELSA BUY 304 400 31.6 8.3

PGAS ADD 2,130 2,350 10.3 14.8

Oil and Gas sector


Major OPEC oil producers


US shale oil output and breakeven point

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

Production Exploration Development Administration

Source: SKK Migas, Sinarmas Investment Research

Indonesia upstream investment

0.0

4.0

8.0

12.0

16.0

20.0


Saudi Arabia Iraq Iran Venezuela

9.0

46.3

54.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

US Shale oil production (in mn bpd) US Shale breakeven point (in USD/barrel) Oil price (in USD/barrel)

Oil and Gas Sector

PT Elnusa Tbk.

BUY

We maintain our BUY rating on PT Elnusa Tbk. (ELSA) with

52-week target price of 400. Our TP provides 31.6% upside and

implies 8.3x FY20F PE (-0.6SD from 5 years average). ELSA is

currently trading at an undemanding valuation (6.3x FY20 forward

PE) despite delivering a robust performance. ELSA’s share price has

declined by 10% YTD, with valuation derating to –1.5SD despite

posting 8% EPS growth in 9M19, on track to achieve our target of

18% EPS growth in FY19E due to a lower base in 4Q18. We see

attractive opportunity to buy the stock at current level. We expect

ELSA to continue delivering high single digit EPS growth in years

ahead supported by downstream business growth and recovery in

the upstream segments. Downside risks to our call are lower than

expected oil price and slow down in upstream activity investment.

Solid downstream growth. The expansion to downstream

business has borne fruit for the company. Downstream business

has been growing by 38% in the past 5 years, now contributing

80% of earnings as of 9M19 compared to 12% in FY14.

Combination of organic growth (higher fuel consumption and

increasing market share) and inorganic growth (M&A) have

supported the growth. We expect ELSA to post another 9% CAGR

earnings growth in the next five years.

Recovery on the upstream business. We believe upstream

investment activity will continue to recover in the upcoming years

which has currently passed its bottom cycle. 2018 marked the first

rebound in the upstream investment, which we expect the uptrend

to continue in the next few years. Higher upstream activity and

stable oil price should result in a better tariff and margin for ELSA.

Currently, we are only baking in a 0.2% net margin improvement

in the upstream segment with flat new contract growth. Hence,

additional upside surprise from our base scenario is a bonus.

Valuation. Our target price of IDR 400 per share is derived from

DCF based valuation (12% WACC and 1% terminal growth). ELSA

is currently trading at 6.3x FY20 forward PE, -1.5SD from 5 years

average PE. Given the solid earnings growth from the downstream

business paired with an upstream recovery, we see current share

price to be undemanding.

104

Stock Information

Bloomberg Ticker ELSA IJ

52-Week High 416

52-Week Low 270

FY20F P/E 8.3x

FY20F P/BV 0.8x




Current Price 304


% Change 31.6%


Revenue 6,625 8,081 8,227 8,365 8,737

% growth 33.1% 22.0% 1.8% 1.7% 4.4%

Gross Profit 652 812 848 857 904

Net Profit 276 323 353 375 409

% growth 11.8% 17.0% 9.1% 6.2% 9.1%

Gross Margin (%) 9.8% 10.0% 10.3% 10.2% 10.4%

Net Margin (%) 4.2% 4.1% 4.3% 4.5% 4.7%

Return on Equity (%) 8.5% 9.3% 9.5% 9.4% 9.6%

Return on Assets (%) 4.8% 4.9% 5.2% 5.3% 5.4%

EPS (IDR) 38 44 48 51 56

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ELSA IJ Price Volume Graph

Volume ELSA

105



Oil and Gas | Elnusa

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & equivalents 782 690 959 1,325 1,683


Other CA 478 663 657 599 647

Total CA 2,734 3,135 3,430 3,787 4,320

Fixed Assets 1,917 2,000 1,975 1,868 1,713

Other LT Assets 1,068 1,423 1,412 1,421 1,475

Total Assets 5,719 6,558 6,817 7,076 7,508

Trade payables 388 472 479 487 509

ST loans 733 1,036 1,038 1,017 1,095

Other CL 1,074 1,307 1,326 1,350 1,408

Total CL 2,194 2,815 2,843 2,854 3,011

LT loans 225 203 182 164 148

Other 55 67 68 69 72


Share & APIC 1,166 1,166 1,166 1,166 1,166


Other Equity (52) (49) (47) (44) (41)

Total Equity 3,245 3,474 3,723 3,988 4,277


5,719 6,558 6,817 7,076 7,508

2018 2019E 2020F 2021F 2022F

Profitability

ROE 8.5% 9.3% 9.5% 9.4% 9.6%

ROA 4.8% 4.9% 5.2% 5.3% 5.4%

EBITDA Margin 11.2% 10.3% 10.6% 10.9% 11.1%

Gross Margin 9.8% 10.0% 10.3% 10.2% 10.4%



Liquidity

Current Ratio 1.2 1.1 1.2 1.3 1.4

Solvency

Debt to Equity 0.3 0.4 0.3 0.3 0.3

Debt to Assets 0.2 0.2 0.2 0.2 0.2

Valuation


Price to Book (PBV) 0.9 0.8 0.8 0.7 0.7

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 6,625 8,081 8,227 8,365 8,737

Cost of Revenue 5,973 7,270 7,379 7,508 7,833

Gross Profit 652 812 848 857 904


Other 68 4 1 6 5

EBIT 448 503 519 541 581

EBITDA 745 834 874 916 971

Net Financing (71) (44) (44) (35) (29)

EBT 377 459 476 506 552

Tax (101) (131) (118) (126) (138)

NCI 0 5 5 6 6

Net Profit 276 323 353 375 409

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 276 323 353 375 409

Depreciation 297 331 355 374 390

Chg. in NWC (74) (175) 1 40 (96)



Chg. in LT Assets (161) (355) 11 (8) (55)




Chg. in ST Loans 35 303 2 (20) 77

Chg. in LT Loans 225 (23) (20) (18) (16)

Chg. in Other - 2 3 3 3

Dividends Paid (83) (97) (106) (112) (123)


Beginning Cash 903 782 690 959 1,325

Change in Cash (121) (92) 269 366 358

Ending Cash 782 690 959 1,325 1,683

Oil and Gas Sector

PT Perusahaan Gas Negara Tbk.

ADD

Improving quarterly performance supported by higher

distribution volume. PGAS recorded 3Q19 revenue and net profit

at USD 1.0 bn (+5.2% YoY, +10% QoQ) and USD 75 mn (+15.6%

YoY, vs loss of USD 11 mn in 2Q19) respectively, supported by a

strong recovery in distribution volume. PGAS distribution jumped to

971 BBTUD in 9M19 (vs 932 BBTUD in 6M19), as demand from

power sector rose in the quarter. Strong volume trend continued to

build up through Oct-19, with the volume recorded at 978 BBTUD.

On the flip side, transmission volume remained soft (-2.2% YoY)

while upstream volume fell 27% yoy due to several expiry block.

Earnings set to recover. We expect a strong distribution volume

trend to continue in FY20, driven by the higher demand in the

power sector and manufacturing industry. In addition, the

upcoming 7/11 regulation should also protect the distribution

margin. We are baking in 990 BBTUD (+1.5% YoY) volume in

FY20F, with the distribution margin remains stable at USD 2.3 per

MMBTU. On the transmission segment, we expect a similar volume

in FY20 as compared to the previous year. Meanwhile, steady oil

price at USD 60 per barrel should lift Saka earnings in FY20, after a

weak performance in FY19. All in all, we forecast PGAS earnings to

jump by 25% YoY in FY20, booking net profit of USD 270 mn.

Government decide to drop the plan of gas price hike.

Previously, PGAS plans to raise gas price by ~7% for the industrial

segments starting in Nov-19. However, the government recently

dropped the plan as they want to maintain the competitiveness of

domestic products. By keeping the price at current levels, the

industry won’t increase its cost of production. Despite bailing the

plan, we think that the government will still find a win-win solution

with gas players, in order to continue promoting gas infrastructure

expansion. One possible course is to lower the price at the

upstream level (cost for PGAS), which the government is currently

looking at. If realized, this should provide upside surprise for PGAS.

Valuation and recommendation. We reiterate our ADD rating on

PGAS, with 52-week target price at IDR 2,350 per share (10%

upside), implying FY20F PE at 14.8x (5-years average). Downside

risks are lower than expected volume and government regulations.

106

Stock Information

Bloomberg Ticker PGAS IJ

52-Week High 2,720

52-Week Low 1,775

FY20F P/E 14.8x

FY20F P/BV 1.1x




Current Price 2,130


% Change 10.3%


Revenue 3,870 3,760 3,862 3,963 4,068

% growth 8.4% -2.8% 2.7% 2.6% 2.6%

Gross Profit 1,310 1,155 1,182 1,196 1,254

Net Profit 305 208 270 251 272

% growth 54.9% -31.6% 29.7% -7.1% 8.4%

Gross Margin (%) 33.8% 30.7% 30.6% 30.2% 30.8%

Net Margin (%) 7.9% 5.5% 7.0% 6.3% 6.7%

Return on Equity (%) 8.1% 6.3% 7.8% 6.8% 7.0%

Return on Assets (%) 3.8% 2.8% 3.7% 3.4% 3.6%

EPS (USD) 0.013 0.009 0.011 0.010 0.011

107



Oil and Gas | Perusahaan Gas Negara

(USD Mn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalent 1,315 630 915 1,166 1,455


Other CA 617 626 643 649 675

Total CA 2,474 1,784 2,100 2,371 2,701

Fixed Assets 2,861 2,819 2,759 2,693 2,620

Other LT assets 2,604 2,607 2,515 2,444 2,363

Total Assets 7,939 7,210 7,375 7,508 7,684

ST loans 768 74 68 61 55

Other CL 836 783 810 832 849

Total CL 1,605 856 878 894 904

LT loans 2,762 2,622 2,536 2,441 2,397

Others 371 360 370 380 390


Share & APIC (124) (124) (124) (124) (124)


NCI 627 668 721 770 823

Other Equity (61) (61) (61) (61) (61)

Total Equity 3,202 3,371 3,590 3,794 4,015

Total Equity & Lia- 7,939 7,210 7,375 7,508 7,705

2018 2019E 2020F 2021F 2022F

Profitability

ROE 8.1% 6.3% 7.8% 6.8% 7.0%

ROA 3.8% 2.8% 3.7% 3.4% 3.6%

Gross Margin 33.8% 30.7% 30.6% 30.2% 30.8%



Liquidity

Current Ratio 1.5 2.1 2.4 2.7 3.0

Solvency

Debt to Equity 1.1 0.8 0.7 0.7 0.6

Debt to Assets 0.4 0.4 0.4 0.3 0.3

Valuation


Price to Book (PBV) 1.2 1.2 1.1 1.1 1.0

(USD Mn) 2018 2019E 2020F 2021F 2022F

Revenue 3,870 3,760 3,862 3,963 4,068

Cost of Revenue 2,561 2,605 2,680 2,768 2,814

Gross Profit 1,310 1,155 1,182 1,196 1,254


Other income 190 160 203 211 213

EBIT 784 606 699 665 701

EBITDA 1,106 897 1,015 1,010 1,034

Net Financing (119) (143) (134) (133) (129)

Profit from JV 80 79 82 84 86

EBT 585 383 483 448 486

Tax 220 134 159 148 160

NCI 60 41 53 49 53

Net Profit 305 208 270 251 272

(USD Mn) 2018 2019E 2020F 2021F 2022F

Net Income 305 208 270 251 272

Dep. & Amo. 521 514 533 562 548

Chg. in Impairment 26 - - - -

Chg. in NWC 31 (49) (4) 2 (24)



Oil & Gas properties (169) (155) (150) (154) (159)

Chg. in LT assets 261 (27) (5) (38) (19)

Chg. in LT liabilities 48 (11) 10 10 10


Chg. in LT liabilities (752) - - - -

Chg. in ST loans 668 (695) (5) (7) (6)

Chg. in LT loans 54 (140) (86) (96) (44)

Dividends Paid (117) (80) (104) (97) (105)

Others (544) 41 53 49 53


Beginning Cash 1,140 1,255 630 915 1,166

Change in Cash 115 (625) 286 250 289

Ending Cash 1,255 630 915 1,166 1,455

Plantation Sector

The Arrival of Long-Awaited Positive Breeze

OVERWEIGHT

The beginning of structural slowdown in CPO

production. We reiterate our earlier view on potential

slowdown in CPO production that may restrain supply

onwards. In addition to MPOB data, we also gathered

several large CPO planters in Indonesia and Singapore

to learn about the latest trends. The findings indicated

that in 9M19, Singaporean CPO planters as a whole

experienced a 6.3%/3.6% drop in FFB/CPO production.

In the same period, CPO planters in Indonesia also saw

at 5%/5.7% reduction in their FFB/CPO production. The

declining production across the countries may be

attributable to limited new plantings in the previous

year. In Indonesia, we also notice more aggressive

replanting programs have been done by large CPO

planters with aging tree profile in 2019 and is still

ongoing. The aggressive replanting in may keep

Indonesia’s CPO output low in the next few years,

leading to potential supply disruption.

Cutback in fertilizer and drought may put

pressure on output in 2020. In addition to limited

new mature areas, CPO output both in Indonesia and

Malaysia are expected to see flat to minimal growth in

2020. Noting industry analyst Dorab Mistry, Malaysian

output is seen down to 19.3mn tons while Indonesian

will see 44mn tons production, rise by just 1mn tons in

2020. This will be on the back of lack of fertilizers

application in the past few years during the weak CPO

price period coupled with recent drought and haze that

may have knock-on effect on production yield. While

quoting from the latest USDA report, it is estimated

that Indonesia will produce CPO of 43mn tons (+3.6%

FY19: a bit delayed, but CPO price finally saw an

acceleration. Although later than expected, CPO price

has subsequently recovered since mid-19 that stands

still at MYR 2,850/ton at current. Several backdrops on

rising CPO price in 2019 are: 1) supportive MPOB data

on production and inventory, 2) better demand seen in

China and India, 3) mini trade deal between US-China,

and 4) brighter future industry outlook. Noise still came

from the European Union which plans to curb palm-

based biodiesel, however the issue may have been

offset by the promising Indonesia biodiesel

implementation. Quoting from Malaysia Palm Oil Board

(MPOB), CPO stockpiles dropped constantly to 2.3mn

tons for Nov-19 (-25% from end of FY18) close to its 5-

year average, on muted production (+4.6% YoY YTD

Jan-Nov’19) and solid uplift in exports (+13.3% YoY

YTD Jan-Nov’19) stemming from India and China.

108

Source: MPOB, Bloomberg, Sinarmas Investment Research

Inventory almost fall to its 5-year average level

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Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19

MPOB Production MPOB Export MPOB Inventory 5Y Avg Inventory

Plantation | Sector Outlook

(+16.3% from FY19E average CPO price) which we

believe is enough to lift CPO planters’ earnings next

year.

Expecting recovery in CPO planters’ earnings in

2020. We forecast the CPO planters under our

coverage (AALI, LSIP, and SIMP) to continue booking

FFB and CPO decline in 2020 despite at a moderate

pace compared to 2019’s. However, net profit along

with margins will surge stemming from higher CPO

price assumption. We forecast AALI and LSIP’s net

profit to surge by 417.8%/256.4% while SIMP’s will

turn positive in 2020.

We reiterate our stance to OVERWEIGHT for

plantation sector on brighter industry outlook and

higher CPO price. Our bullish stance on the sector as

CPO price will remain strong for the aforementioned

positive catalysts in the industry. This should then

translate into significant recovery for CPO planters’

performance which has been sluggish throughout 2019.

For this sector we recommend BUY for LSIP and SIMP,

while NEUTRAL for AALI. We prefer LSIP the most for

its being pure upstream CPO player which will be a

direct beneficiary of higher CPO price in 2020.

YoY) and Malaysia at 21mn tons (+0.9% YoY) for

2019/2020 marketing year.

Biodiesel mandate in Southeast Asia to assure

CPO demand. In addition to food demand, biodiesel

mandate remains the key to drive incremental CPO

demand. Indonesia has successfully implemented B20

program which exceeds 5.9mn kiloliters in 2019 and

will start B30 program effectively in January 2020 with

target of 9.6mn kiloliters. The implementation on B30

itself is estimated to lift up Indonesia’s incremental

CPO domestic consumption at least of 3mn tons. Align

with Indonesia, Malaysia is also committing to move

toward 20% biodiesel blend totaling 1.5mn kiloliters.

We believe the smooth execution of the biodiesel

program across countries will limit global supply, lead

to lower inventory and eventually being supportive to

CPO price onwards.

US-China trade deal and correlation to CPO price.

The development of US-China trade war has recently

become a key to CPO price movement, for its

correlation with soybeans. Post the rally of CPO price

recently, we observe that the gap between CPO and

soybean oil has been narrowed significantly which may

raise a concern whether CPO price will be sustainable

or not at current price. However, the positive results

from the phase one trade deal that require China’s

committing to import US$ 32bn more in farm products

over the next two years should resume their purchase

for US soybeans. Consequently, soybean price should

recover back resulting in normalized spread between

CPO and soybean oil.

Favorable CPO price in 2020. CPO price has rallied

significantly since mid-year and currently stands strong

at MYR 2.850/ton (+36.6% from end of 2018). We do

not expect CPO price to sustain at current high level

however will remain favorable due to lower output and

inventory level coupled with strong demand from the

biodiesel mandate in 2020. As a result, we are now

seeing CPO price to average at MYR 2,500/ton in 2020

109

Ticker Rating CP TP % Chg FY20F EV/ha

AALI NEUTRAL 13,425 14,600 8.8 8,600

LSIP BUY 1,420 1,720 21.1 5,800

SIMP BUY 390 450 15.4 3,870

Plantation sector


Narrowing spread between soyoil and CPO


CPO stocks move closely with CPO prices

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Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19

Soy Oil Premium to Palm Oil Average

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19

CPO Price LSIP AALI SIMP

Plantation Sector

PT Astra Agro Lestari Tbk.

NEUTRAL

We lower our BUY call to NEUTRAL for PT Astra Agro Lestari

Tbk (AALI) with 52-week target price of IDR 14,600. Our TP

represents 8.8% potential upside, derived from 8,600 EV/ha. The

encouraging outlook of the industry should promote better earnings

for AALI next year. However, as portion of downstream and trading

business contribute more to AALI, margins may find difficulty to

recover above 20% (FY16-18 average GPM). Therefore, despite re-

rating may still in sight if CPO price remains strong, yet should be

limited from current price. We prefer pure upstream as well as

cheap name such as LSIP and SIMP. Downside risks to our call are

unsustainable CPO price and higher portion of downstream and

trading that may result in squeezing margins.

Maintain our optimism on the industry outlook. Moving

forward to 2020, the industry outlook should remain rosy supported

by declining CPO output both in Indonesia and Malaysia, coupled

with promising demand stemming from biodiesel program in both

countries. Although CPO price is unlikely to sustain at current solid

level of MYR 2,850/ton, yet an average of MYR 2,500/ton (+16.3%

from FY19E) is sufficient to lift up CPO planter’s earnings in 2020.

Uplift in earnings on higher CPO price. As of 10M19, AALI

recorded significant drop in FFB and CPO production of 12.2% and

13.3% respectively, which may be on lower nucleus mature area of

8,900ha. Although CPO sales were still up by 16.8% as of 9M19

(~36% came from CPO trading). We believe AALI should still see

decline in its operational metrics, hence forecasting -3%/-2.3% for

FFB and CPO, while ASP rise to IDR 7,575 (+16.3% from FY19E) on

recent rally in CPO price. As a result, top and bottom-line grow by

10.9%/417.8% with GPM/NPM translated to 17.9%/6.7%.

Aggresive replanting is ongoing. AALI finally seen being more

aggresive in replanting, in which 6,263ha was replanted as of

10M19, up by 76.2% YoY. AALI’s nucleus immature area also

increased to 9.8% of nucleus mature (vs 8.7% in 10M18). The

replanting should be persist noting AALI’s trees have reached 15.3

average age. Production may keep decline and working capital

increase as the result of replanting, though may be good to secure

future growht

110

Stock Information

Bloomberg Ticker AALI IJ

52-Week High 14,400

52-Week Low 9,500

FY20F P/E 22.1x

FY20F P/BV 1.4x






% Change 8.8%


Revenue 19,084 17,151 19,016 19,604 19,634

% growth 10.3% -10.1% 10.9% 3.1% 0.2%

Gross Profit 3,540 1,908 3,407 3,565 3,513

Net Profit 1,439 246 1,272 1,355 1,315

% growth -26.9% -82.9% 417.8% 6.6% -3.0%

Gross Margin (%) 18.5% 11.1% 17.9% 18.2% 17.9%

Net Margin (%) 7.5% 1.4% 6.7% 6.9% 6.7%

Return on Equity (%) 7.5% 1.3% 6.4% 6.5% 6.0%

Return on Assets (%) 5.5% 0.9% 4.5% 4.7% 4.4%

EPS (IDR) 747 128 661 704 683

111



Plantation | Astra Agro Lestari

(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 2,368 1,993 2,191 2,268 2,267


Total CA 4,501 4,741 4,654 4,471 4,594

Fixed Assets 10,219 10,946 11,372 11,712 11,970

Plantations 7,917 8,707 9,222 9,777 10,315

Other Non CA 4,221 3,108 3,434 3,626 3,639

Total Assets 26,857 27,503 28,682 29,585 30,518

ST Debt 1,125 2,000 2,000 2,000 2,000

Other CL 1,952 1,790 1,810 1,907 1,917

Total CL 3,077 3,790 3,810 3,907 3,917

LT Debt 3,606 3,606 3,606 3,606 3,606

Other Non CL 700 662 767 774 767


Share & APIC 4,808 4,808 4,808 4,808 4,808


Others 485 688 725 754 787

Total Equity 19,475 19,445 20,498 21,298 22,227


26,857 27,503 28,682 29,585 30,518

2018 2019E 2020F 2021F 2022F

Profitability

Gross Margin 18.5% 11.1% 17.9% 18.2% 17.9%


EBITDA Margin 16.8% 9.7% 16.6% 17.1% 17.2%

Net Margin 7.5% 1.4% 6.7% 6.9% 6.7%

Liquidity

Current Ratio (x) 1.5 1.3 1.2 1.1 1.2

Solvency

Debt to Equity (x) 0.2 0.3 0.3 0.3 0.3

Debt to Assets (x) 0.2 0.2 0.2 0.2 0.2

Valuation


Price to Book (x) 1.4 1.4 1.4 1.3 1.3

Key Assumptions

FFB Nuc. (Ths Tons) 4,418 4,079 3,956 3,925 3,909

FFB Yield (Ha/Ton) 21.8 20.6 19.7 19.6 19.0

CPO Prod (Ths Tons) 1,937 1,761 1,721 1,700 1,694

CPO ER 20.2% 20.2% 20.4% 20.3% 20.3%

CPO Vol. (Ths Tons) 1,634 1,761 1,678 1,658 1,652

ASP (IDR/Kg) 7,275 6,516 7,575 7,851 7,851

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 19,084 17,151 19,016 19,604 19,634

% growth 10.3% -10.1% 10.9% 3.1% 0.2%

COGS (15,545) (15,244) (15,609) (16,039) (16,121)

% growth 18.1% -1.9% 2.4% 2.8% 0.5%

Gross Profit 3,540 1,908 3,407 3,565 3,513

% growth -14.6% -46.1% 78.6% 4.6% -1.5%


Opex to Sales (%) -6.4% -7.1% -7.0% -7.0% -7.0%

Other Inc (Exp) 29 214 190 196 196

EBIT 2,355 911 2,265 2,396 2,333

% growth -23.2% -61.3% 148.6% 5.8% -2.6%

EBITDA 3,203 1,670 3,149 3,360 3,379

% growth -17.2% -47.9% 88.6% 6.7% 0.6%

Net Financing (148) (348) (319) (320) (321)

EBT 2,207 563 1,946 2,076 2,012

% growth -23.4% -74.5% 245.8% 6.7% -3.1%

Tax Expenses (686) (304) (605) (646) (626)

Net Income 1,439 246 1,272 1,355 1,315

% growth -26.9% -82.9% 417.8% 6.6% -3.0%

EPS (IDR) 747 128 661 704 683

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 1,439 246 1,272 1,355 1,315

Dep. & Amortization 959 986 1,143 1,235 1,314

Chg. In NWC 9 (142) 89 65 41



Chg. in LT Assets (1,315) 1,112 (326) (191) (13)

Others 87 190 (32) (47) (39)



Chg. in Debt 762 875 - - -

Dividends Paid (835) (478) (256) (584) (418)

Others 122 (38) 105 7 (6)


Chg. in Cash (213) 261 (20) (215) 156

Beginning Cash 262 49 310 290 75

Ending Cash 49 310 290 75 230

Plantation Sector

PT PP London Sumatra Indonesia Tbk.

BUY

We maintain our BUY call on PT London Sumatra Indonesia

Tbk (LSIP) with 52-week target price of IDR 1,720. Our TP

represents 21.1% potential upside, pegged to 5,800 EV/ha. The

optimism on CPO price outlook should bolster LSIP earnings in

2020. We remain our preference on LSIP among CPO planters on

its pure upstream status, which is directly impacted by the rebound

in CPO price. Downside risks to our call are fall in CPO price and

disruption form its non-CPO business.

Maintain our optimism on the industry outlook. As mentioned

before, we reiterate our optimism on palm oil sector on the back of

lower CPO output both in Indonesia and Malaysia and higher

demand on biodiesel program in both countries. Although CPO price

is unlikely to sustain at current solid level of MYR 2,850/ton, yet an

average of MYR 2,500/ton (+16.3% from FY19E) is sufficient to lift

up CPO planter’s earnings in 2020.

Accelerating earnings in 2020. In 9M19, LSIP posted FFB/CPO

production decline by 3.4%/11.3% YoY on lower nucleus mature

area of 1,529 from last year’s and significant drop in external FFB.

The aging tree profile along with replanting program should keep

LSIP’s FFB/CPO production declining, therefore we foresee -2%

drop in FFB/CPO in 2020. To add, we assume LSIP’s CPO ASP at

IDR 7,733 (+13.8% from FY19E), which then brings LSIP’s top and

bottom-line grow by 10.2%/256.4%, translated into 20.7%/10.2%

FY20F GPM/NPM. Following the recent rally of CPO price since end

of 3Q19, we expect recovery in LSIP’s earnings will be seen starting

4Q19 and afterwards.

Balance sheet in good shape, no financial issue on

replanting investment. With average tree age of 16.6years as of

9M19, LSIP currently and onwards should undertake replanting

more aggresively to secure future growth. The issue with replanting

may come from high working capital needs and cash flow

disruption. However, considering LSIP’s zero debt and ample cash

position of IDR 1.4tn in 9M19, LSIP is likely able to secure its

working capital in the near and medium term.

112

Stock Information

Bloomberg Ticker LSIP IJ

52-Week High 1,520

52-Week Low 1,000

FY20F P/E 27.6x

FY20F P/BV 1.3x




Current Price 1,420


% Change 21.1%


Revenue 4,020 3,790 4,176 4,252 4,248

% growth -15.2% -5.7% 10.2% 1.8% -0.1%

Gross Profit 683 457 865 874 822

Net Profit 331 119 426 421 366

% growth -54.8% -64.0% 256.4% -1.0% -13.3%

Gross Margin (%) 17.0% 12.0% 20.7% 20.6% 19.3%

Net Margin (%) 8.2% 3.2% 10.2% 9.9% 8.6%

Return on Equity (%) 4.0% 1.4% 5.0% 4.8% 4.0%

Return on Assets (%) 3.3% 1.2% 4.2% 4.0% 3.4%

EPS (IDR) 49 18 62 62 54

113

Plantation | PP London Sumatra Indonesia



(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 489 354 371 352 331


Total CA 2,444 2,299 2,580 2,665 2,630

Fixed Assets 3,141 3,063 3,020 3,009 3,000

Plantations 3,094 3,140 3,354 3,582 3,817

Other Non CA 1,359 1,357 1,360 1,385 1,383

Total Assets 10,037 9,859 10,314 10,641 10,831

Trade Payables 312 258 240 255 257

Other CL 213 250 236 249 261

Total CL 525 508 475 504 518

Debt - - - - -

Other Non CL 1,180 1,031 1,142 1,189 1,169


Share & APIC 1,713 1,713 1,713 1,713 1,713


Others 13 13 13 13 13

Total Equity 8,332 8,319 8,697 8,947 9,144


10,037 9,859 10,314 10,641 10,831

2018 2019E 2020F 2021F 2022F

Profitability

Gross Margin 17.0% 12.0% 20.7% 20.6% 19.3%


EBITDA Margin 18.4% 13.2% 21.4% 20.2% 18.4%

Net Margin 8.2% 3.2% 10.2% 9.9% 8.6%

Liquidity

Current Ratio (x) 4.7 4.5 5.4 5.3 5.1

Solvency

Debt to Equity (x) 0.0 0.0 0.0 0.0 0.0

Debt to Assets (x) 0.0 0.0 0.0 0.0 0.0

Valuation


Price to Book (x) 1.4 1.4 1.3 1.3 1.3

Key assumptions

FFB Nuc. (Ths Tons) 1,516 1,459 1,431 1,417 1,423

FFB Yield (Ha/Ton) 17.4 17.0 16.8 16.7 16.9

CPO Prod. (Ths Tons) 453 402 394 390 392

CPO ER 23.0% 23.0% 23.0% 23.0% 23.0%

CPO Sales (Ths Tons) 436 434 421 410 411

ASP (IDR/Kg) 6,964 6,795 7,733 8,016 8,016

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 4,020 3,790 4,176 4,252 4,248

% growth -15.2% -5.7% 10.2% 1.8% -0.1%

COGS (3,337) (3,333) (3,310) (3,377) (3,426)

% growth -3.1% -0.1% -0.7% 2.0% 1.4%

Gross Profit 683 457 865 874 822

% growth -47.2% -33.2% 89.5% 1.0% -6.0%


Opex to Sales (%) -9.3% -10.4% -10.3% -10.6% -11.1%

Other Inc (Exp) 30 37 41 41 41

EBIT 340 101 477 465 390

% growth -62.4% -70.3% 373.2% -2.5% -16.0%

EBITDA 738 501 893 860 780

% growth -43.6% -32.1% 78.3% -3.7% -9.4%


EBT 417 168 549 544 472

% growth -56.7% -59.8% 227.4% -1.0% -13.3%

Tax Expenses (88) (50) (126) (125) (108)

Net Income 329 117 424 420 364

% growth -55.1% -64.3% 260.6% -1.0% -13.3%

EPS (IDR) 49 18 62 62 54

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 331 119 426 421 366


Chg. In NWC (7) 179 (82) 52 26



Chg. in LT Assets (104) 2 (3) (25) 1

Others (26) (149) 110 48 (21)




Dividends Paid (294) (133) (48) (171) (169)

Others 67 - - - -


Chg. in Cash 30 51 232 108 (24)

Beginning Cash 1,633 1,663 1,714 1,946 2,054

Ending Cash 1,663 1,714 1,946 2,054 2,031

Plantation Sector

PT Salim Ivomas Pratama Tbk.

BUY

We initiate coverage on PT Salim Ivomas Pratama Tbk

(SIMP) with 52-week target price of IDR 450. Our TP

represents 15.4% potential upside, derived from 3,870 EV/ha.

Following the recent CPO price rally and our FY20F CPO price

assumption of MYR 2,500/ton (+16.3% from FY19E), SIMP’s

earnings should turn positive in 2020. Our call is mainly of SIMP’s

attractive valuation. Downside risks to our call are unsustainable

CPO price, slower growth in EOF, and increases in leverage or

finance cost that may directly squeeze SIMP’s earnings.

An integrated CPO player. SIMP is CPO player that operates both

in upstream and downstream businessses with contribution to sales

portion of 23%:77% as of 9M19. For the plantation segment, total

planted area amounting to 298,416ha in which 83.3% palm oil,

5.6% rubber, 4.4% sugar and the rest for others (industrial timber,

cocoa, tea). Meanwhile edible oil and fats (EOF) consists of cooking

oil (Bimoli and Delima), margarine, and etc.

Growing demand in EOF division. The positive of SIMP we think

is the stable demand growth for EOF products. On management’s

note, despite the sluggish upstream, EOF sales volume was

estimated still up by low teens. In addition, pricing in EOF is less

volatile athough remain adjustable (despite the lagging times).

While the negatives come from the thin margin whereas normal

EBITDA margin for EOF is only between 3%-5%. Furthermore,

intense competition lingers on the division.

Thin margin and leverage lead to earnings volatility. Unlike

its subsidiary LSIP, SIMP records leverage in its book with debt to

equity (DER) of 0.6x. Despite DER is reasonable, however coupled

with SIMP’s thin margin, earnings volatility risk is real. With our

CPO price assumption, we forecast SIMP to book top-line growth of

7.1%, while net profit turns positiva at IDR 328bn. GPM/NPM will

be seen at 18.9%/2.2% in FY20F.

Cheapest among the peers. On our estimates, SIMP trades at

~3,200 EV/ha, which is one of the lowest in the sector. It also

trades at 0.34x forward PBV, which make SIMP more attractive.

114

thi

Stock Information

Bloomberg Ticker SIMP IJ

52-Week High 540

52-Week Low 308

FY20F P/E 21.7x

FY20F P/BV 0.4x




Current Price 390


% Change 15.4%


Revenue 14,190 13,907 14,896 15,344 15,541

% growth -10.3% -2.0% 7.1% 3.0% 1.3%

Gross Profit 2,458 1,976 2,810 2,826 2,843

Net Profit (77) (417) 328 319 327

% growth N/A N/A N/A -2.8% 2.7%

Gross Margin (%) 17.3% 14.2% 18.9% 18.4% 18.3%

Net Margin (%) -0.5% -3.0% 2.2% 2.1% 2.1%

Return on Equity (%) -0.4% -2.3% 1.8% 1.7% 1.8%

Return on Assets (%) -0.2% -1.2% 1.0% 0.9% 0.9%

EPS (IDR) (5) (26) 21 20 21

115

Plantation | Salim Ivomas Pratama



(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 2,428 2,075 2,246 2,365 2,352

Other Current Assets 1,096 974 1,064 1,119 1,111

Total CA 6,989 6,654 6,612 7,113 7,593

Fixed Assets 20,066 19,911 19,881 19,787 19,680

Other Non CA 27,678 27,211 27,428 27,415 27,299

Total Assets 34,667 33,864 34,040 34,527 34,892

ST Debt 5,886 6,661 6,209 6,209 6,209

Trade Payables 1,182 1,038 1,011 1,095 1,092

Other CL 724 747 756 766 776

Total CL 7,791 8,446 7,977 8,070 8,078

LT Debt 4,218 3,941 3,941 3,941 3,941

Other Non CL 8,588 7,544 7,825 7,929 7,987


Share & APIC 5,658 5,658 5,658 5,658 5,658


Others 3,224 3,222 3,222 3,222 3,222

Total Equity 18,287 17,874 18,238 18,528 18,828


34,667 33,864 34,040 34,527 34,892

2018 2019E 2020F 2021F 2022F

Profitability

Gross Margin 17.3% 14.2% 18.9% 18.4% 18.3%


EBITDA Margin 15.7% 12.7% 17.9% 17.4% 17.5%

Net Margin -0.5% -3.0% 2.2% 2.1% 2.1%

Liquidity

Current Ratio (x) 0.9 0.8 0.8 0.9 0.9

Solvency

Debt to Equity (x) 0.6 0.6 0.6 0.5 0.5

Debt to Assets (x) 0.3 0.3 0.3 0.3 0.3

Valuation

Price to Earnings (x) N/A N/A 21.7 22.3 21.8

Price to Book (x) 0.4 0.4 0.4 0.4 0.4

Key assumptions

FFB Nuc. (Ths Tons) 3,375 3,274 3,178 3,150 3,149

FFB Yield (Ha/Ton) 15.9 15.6 15.3 15.2 15.4

CPO Prod. (Ths Tons) 921 858 826 814 811

CPO ER 22.0% 21.7% 21.7% 21.7% 21.7%

CPO Sales (Ths Tons) 881 871 826 814 811

ASP (IDR/Kg) 6,956 6,795 7,761 8,044 8,044

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 14,190 13,907 14,896 15,344 15,541

% growth -10.3% -2.0% 7.1% 3.0% 1.3%

COGS (11,732) (11,930) (12,086) (12,518) (12,698)

% growth -6.4% 1.7% 1.3% 3.6% 1.4%

Gross Profit 2,458 1,976 2,810 2,826 2,843

% growth -25.4% -19.6% 42.1% 0.6% 0.6%


Opex to Sales (%) -10.6% -10.6% -10.0% -10.2% -10.1%

Other Inc (Exp) 18 (75) (30) (32) (49)

EBIT 973 433 1,287 1,232 1,231

% growth -44.5% -55.5% 197.2% -4.2% -0.1%

EBITDA 2,233 1,771 2,664 2,672 2,723

% growth 15.7% 12.7% 17.9% 17.4% 17.5%

Net Financing (767) (833) (741) (701) (686)

EBT 207 -401 546 531 545

% growth -81.7% -293.8% -236.3% -2.8% 2.7%

Tax Expenses (385) (120) (137) (133) (136)

Net Income (77) (417) 328 319 327

% growth -115.8% 444.0% -178.7% -2.8% 2.7%

EPS (IDR) (5) (26) 21 20 21

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income (77) (417) 328 319 327


Chg. In NWC (276) 642 (373) (161) 48

CF from Operating 907 1,563 1,332 1,597 1,868


Chg. in LT Assets (441) 312 (247) (80) 8

Others 280 (767) 281 104 58



Chg. in Debt 587 497 (452) - -

Dividends Paid (28) 7 36 (29) (28)

Others (135) (3) - - -


Chg. in Cash (189) 426 (397) 246 521

Beginning Cash 2,261 2,071 2,498 2,101 2,347

Ending Cash 2,071 2,498 2,101 2,347 2,868

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Developer 9M19 FY19 Target % Target YoY 9M18 FY18 % Target

BSDE 5,264 6,200 84.9% -2.3% 5,388 6,219 86.6%

SMRA 3,353 4,000 83.8% 50.9% 2,222 3,398 65.4%

ASRI 1,815 4,000 45.4% -21.9% 2,323 4,292 54.1%

CTRA 4,150 6,023 68.9% -19.4% 5,147 6,023 85.5%

PWON 1,022 2,200 46.5% -39.9% 1,700 2,203 77.2%

Total 15,604 22,423 69.6% -7.0% 16,780 22,135 75.8%

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Pulp and Paper Sector

Pulp Price Conundrum

NEUTRAL

Pulp demand was bad in 2019, yet no changes in

the underlying segments. 2019 was surely a bad

year for pulp demand due to China’s economic

slowdown. However, question is whether the slowdown

will be temporary or long lasting, as pulp demand will

move correspondingly with China’s economy.

Exempting the slowdown, it is believed that the

underlying segments of pulp, especially tissue, will

continue to grow strongly in China and many other

parts of the world, at around 2.8% per annum until

2030. Not only tissue, the other pulp downstream

product such as packaging has kept on gaining traction

on the back of 1) e-commerce development and 2)

plastic substitution. Recent global trend has also

provided the industry with the opportunity to gradually

replace plastic products such as straw, wrapper and

FY19: sloppy pulp and paper market. FY19 global

pulp and paper industry has been highlighted by the

rapid escalation and a record high pulp inventory level

in both China and European ports. Inventory level has

crawled up starting in 4Q18 which we predicted was

due to the skyrocketing pulp price that touched ~USD

800/ton in mid 2018. This has led to the disagreement

between buyers and sellers. As a result, several big

Chinese paper mills chose to operate with a depressed

inventory, delaying the purchase and takeaways from

China ports in the early 2019. At the same time, global

economic slowdown especially in China and Europe,

two biggest pulp users in the world, has put more

pressure on pulp demand throughout the year. On

various sources, we note that global China BHKP pulp

price has slumped significantly to ~USD 530/ton in mid

-year, reflecting a drastic decline of almost 25% from

2018. Following the industry and price outlook, the

pulp and paper companies under our coverage (INKP

and TKIM) have experienced a flat top-line growth with

dropping margins in 2019.

Supply outlook to remain intact. Similar to 2019,

global pulp production capacity should remain the same

as no further major addition post the 2.8mn tons from

OKI pulp and paper. The next new capacity investment

reported (~3-4mn tons) is coming from several Latin

America mills (Arauco’s MAPA and UPM) which are

expected to complete in 2021-2022. Therefore, we see

no disruption from the supply side in the near to

medium term, though we are more cautious in the

longer term.

128

50

100

150

200

250

450

500

550

600

650

700

750

800

850

Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19 Jun-19

China Import ASP (USD/ton) - LHS PPI Pulp RHS

Source: Bloomberg, fred.stlouis.org, Sinarmas Investment Research

Pulp price slump over 2019

Pulp and Paper | Sector Outlook

quarters at a low fixed price (estimated at USD 480-

500/ton). To note, Suzano has lowered their

inventories by 440KT in 3Q18. Despite the short-term

pressure, however pulp price at ~USD 450-500/ton

may have been bottoming as we believe it is already

close to several pulp producers’ cash cost. Therefore,

we expect less downside risk for pulp price from the

current level, however price recovery may be delayed

and can possibly seen the fastest in 2H20 considering

the current high inventory level. Our assumption on

benchmark pulp price is at USD 610/650/630 per ton

for FY19E/FY20F/FY21F.

Implications on pulp and paper companies’

performances. We believe that there is a hope for

better performances for both INKP and TKIM in 2020

on the back of moderate recovery in pulp price and

higher sales volume. INKP as an integrated pulp and

paper producer should be benefited from its flexibility

to switch its focus between upstream or downstream

by examining pulp price. Meanwhile, TKIM will still see

the benefit of OKI’s ramping up its utilization rate both

in pulp and tissue segments.

We lower our OVERWEIGHT to NEUTRAL stance

on pulp and paper industry. Despite China was seen

improving in the near end of FY19, the overall sector

outlook remains challenging. We believe the best

decision is “wait and see” at current whilst keep on

observing for further outcomes from China, Europe,

and Suzano’s act as it will shape the direction of the

industry ahead. Near term pressure remains for pulp

price while moderate recovery should be more visible in

2H20. We prefer INKP as it will be more directly

impacted by pulp price improvement and its attractive

valuation.

Styrofoam with an eco-friendly fiber-based packaging

onwards. Consequently, we view pulp remains a

growing industry in the long term.

The industry’s direction will be steered by China

and Europe. Starting 2019 with weak demand, recent

news stated that pulp demand in China has been

improving from July to end 3Q19, which was estimated

due to historically low pulp price, seasonally better

demand moving towards Chinese New Year, along with

Suzano’s effort to destock its record high inventories.

Pulp inventories in China ports were also reported down

to 1.75MT (-11% MoM as of Nov-19), despite still being

elevated compared to normal level (~1MT). Meanwhile

European pulp market remains facing tough challenges,

mainly caused by the deceleration in Printing & Writing

(P&W) demand. That led to European’s pulp stockpiles

to remain soaring at 1.87MT per Oct-19. At current,

we remain cautious and further developments on China

and Europe will confirm a clearer outlook for the

industry ahead.

Expectation on pulp price ahead. The remaining

elevated stockpiles both in China and European ports

will keep on pressuring pulp price in the near term.

This will be exacerbated by Suzano’s continuing effort

to destock more of their inventories in the upcoming

129


INKP BUY 7,875 10,400 32.1 10.5

TKIM NEUTRAL 11,300 12,350 9.3 10.5

Pulp and Paper sector

21.1

30.8 34.0

39.0 42.8

55.0 58.9

66.0

2005 2015 2018 2023E

Hardwood (mn tons) Global Market Pulp Demand (mn tons)

Source: PPPC S&D 2019, Suzano, Sinarmas Investment Research

Growing global pulp demand

-

500

1,000

1,500

2,000

2,500

Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19

European Pulp Stockpiles (ths tons) Average Stockpiles

Source: Europulp, Sinarmas Investment Research

High stockpiles in European ports


PT Indah Kiat Pulp and Paper Tbk.

BUY

We maintain our BUY recommendation on PT Indah Kiat

Pulp and Paper Tbk (INKP) with 52-week target price of IDR

10,400. Our TP represents 32.1% potential upside, pegged to

10.5x FY20F PE. Despite challenges may linger on the industry in

the near-term, however some recoveries in pulp price may be

visble next year although with a humble magnitude. As a result, we

expect INKP to book slightly better margins next year. INKP will

focus on expanding in its tissue business ahead while continue

enhancing its production efficiency. Forward looking, INKP now

trades at 7.9x PE and 0.7x PBV which are undemanding. Downside

risk to our call is softer than expeced pulp demand that

continuously pressurizes global pulp price.

Anticipating a modest recovery in pulp price. Considering the

global industry prospect in 2020, we expect a recovery in pulp price

although not at a significant degree and only appeared most

quickly in 2H19. We are now seeing pulp price at USD 650/ton in

FY20F (+6.6% from FY19E). For INKP, we forecast top/bottom-line

growth of 5.9%/17.9% YoY in FY20F. We also see slight margins

expansion whereas GPM/OPM/NPM will reach 28.2/18.7/11% in

2020 (vs 27.2%/17.8%/9.9% in FY19E).

Flexibility, privilege of being integrated. Being a fully

integrated pulp and paper company, INKP operates in both

upstream and downstream (paper, packaging and tissue)

businesses. This will benefit INKP in terms of: 1) a portion of pulp

is used internally (for INKP and affiliated companies) hence less

fear of weak external pulp demand, 2) the visibility to manage

product mix, as INKP could shift to more downstream products if

pulp price softens, vice versa.

Focus on expanding tissue and promoting efficiency. At

current, INKP operates tissue lines totaling 108,000 tons capacity

(FY20F utilization of 80%) and looking forward to add more lines in

the upcoming years as tissue growth outlook remains positive. In

addition, INKP keeps on promoting production efficiency, one of

which by operating 2 new powerplants in early 2020 in its Serang

plant in order to reduce costs. Note that energy cost attributes

~26% to INKP’s COGS.

130

Stock Information

Bloomberg Ticker INKP IJ

52-Week High 13,700

52-Week Low 5,325

FY20F P/E 10.5x

FY20F P/BV 0.9x




Current Price 7,875


% Change 32.1%


Revenue 3,335 3,274 3,467 3,618 3,735

% growth 6.6% -1.9% 5.9% 4.3% 3.2%

Gross Profit 1,204 891 978 981 968

Net Profit 588 323 381 391 380

% growth 42.3% -45.1% 17.9% 2.6% -2.7%

Gross Margin (%) 36.1% 27.2% 28.2% 27.1% 25.9%

Net Margin (%) 17.6% 9.9% 11.0% 10.8% 10.2%

Return on Equity (%) 16.8% 8.3% 9.1% 8.6% 7.8%

Return on Assets (%) 7.2% 3.7% 4.6% 4.8% 4.6%

EPS (USD) 0.107 0.059 0.069 0.071 0.069

131

Pulp and Paper | Indah Kiat Pulp and Paper

(USD Mn) 2018 2019E 2020F 2021F 2022F

Revenue 3,335 3,274 3,467 3,618 3,735

% growth 6.6% -1.9% 5.9% 4.3% 3.2%

COGS (2,132) (2,383) (2,490) (2,637) (2,767)

% growth -4.2% 11.8% 4.5% 5.9% 4.9%

Gross Profit 1,204 891 978 981 968

% growth 33.2% -26.0% 9.7% 0.3% -1.3%


Opex to Sales (%) -9.3% -9.4% -9.5% -9.6% -9.7%

EBIT 894 582 647 634 605

% growth 48.3% -34.9% 11.2% -2.0% -4.5%

EBITDA 1,186 854 942 932 916

% growth 32.2% -28.0% 10.3% -1.1% -1.7%

Net Financing (180) (175) (139) (113) (98)

Other Inc (Exp) 21 24 1 1 1

EBT 736 431 508 521 507

% growth 61.0% -41.5% 17.9% 2.6% -2.7%

Tax Benefit (Exp) (148) (108) (127) (130) (127)

Net Income 588 323 381 391 380

% growth 42.3% -45.1% 17.9% 2.6% -2.7%

EPS (USD) 0.107 0.059 0.069 0.071 0.069

(USD Mn) 2018 2019E 2020F 2021F 2022F

Net Income 588 323 381 391 380


Chg. In NWC (755) 694 (267) (167) (7)

CF from Operating 125 1,289 409 522 684


Chg. in LT Assets 26 (31) (2) (2) (13)

Chg. in LT Liabs 53 (40) 24 16 1



Chg. in Debt 356 (348) (793) (309) (210)

Dividends Paid (39) (56) (31) (36) (37)

Others 5 (13) - - -

CF from Financing 322 (416) (823) (345) (247)

Chg. in Cash 136 547 (698) (80) 152

Beginning Cash 620 756 1,303 605 525

Ending Cash 756 1,303 605 525 676



(USD Mn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalents 756 1,303 605 525 676

Trade Receivables 1,097 847 922 986 992

Inventories 1,182 1,053 1,097 1,155 1,192

Other Current Assets 1,156 750 925 1,016 967

Total CA 4,191 3,953 3,549 3,681 3,827

Fixed Assets 3,934 3,916 3,927 3,900 3,863

Other Non CA 627 658 660 662 675

Total Assets 8,751 8,528 8,137 8,243 8,366

Short Term Debt 1,393 1,780 1,295 1,192 1,156

Trade Payables 147 166 168 182 190

Other CL 202 92 118 148 128

Total CL 1,742 2,038 1,580 1,522 1,474

Long Term Debt 2,977 2,243 1,936 1,730 1,556

Other Non CL 261 221 245 261 262


Share & APIC 2,195 2,195 2,195 2,195 2,195


Others 13 1 1 1 1

Total Equity 3,772 4,026 4,376 4,731 5,074


8,751 8,528 8,137 8,243 8,366

2018 2019E 2020F 2021F 2022F

Profitability

Gross Margin 36.1% 27.2% 28.2% 27.1% 25.9%


EBITDA Margin 35.6% 26.1% 27.2% 25.7% 24.5%

Net Margin 17.6% 9.9% 11.0% 10.8% 10.2%

Liquidity

Current Ratio (x) 2.4 1.9 2.2 2.4 2.6

Solvency

Debt to Equity (x) 1.2 1.0 0.7 0.6 0.5

Debt to Assets (x) 0.5 0.5 0.4 0.4 0.3

Valuation


Price to Book (x) 1.1 1.0 0.9 0.8 0.8

Key Assumptions

Utilization rate 88.0% 88.4% 90.0% 91.6% 93.2%

Sales Vol Growth

Pulp -18.3% -2.9% 4.5% 6.4% 3.8%

Paper 2.7% 7.9% -0.1% 0.1% 0.0%

Packaging -1.4% -0.7% 4.2% 5.5% 2.4%

Pulp price (USD/ton) 790 610 650 630 630


PT Tjiwi Kimia Pulp and Paper Tbk.

NEUTRAL

We lower our BUY to NEUTRAL call on PT Tjiwi Kimia Pulp

and Paper Tbk (TKIM) with 52-week target price of IDR

12,350. Our TP represents 9.3% potential upside. TKIM’s

performance will remain be dependent on the ramping up of OKI

mills in 2020 along with the continuing conversion of white paper

lines to the industrial brown paper lines. On the OKI mills, we

expect a ramping up in its utilization rate, both from pulp and

tissue. OKI will also see more savings in transportation cost once

the seaport construction is finished next year. At current price, we

believe INKP provides more potential upside than TKIM. In

addition, we view that pulp price recovery will impact INKP more

directly. All considered, we prefer INKP to TKIM. Downside risks to

our call is weak global pulp price and slow ramping up in OKI.

Driven by OKI mills. TKIM’s performance will still be driven by

how well OKI manages to ramp up its production in 2020. For

FY20F, we forecast OKI to produce 2.5mn tons of pulp (83.3%

utilization rate), up from 2.2mn tons in FY19E (we expect the

slower production was on downtime). In addition, tissue production

will be at 200ths tons (40% utilization rate). Taking into account

those assumptions and global pulp price at USD 650/ton, we arrive

at USD 255mn contribution from OKI (+24.1% YoY). For TKIM, we

expect a flat top-line growth in 2020 due to higher sales coming

from industrial brown paper that has lower selling price. GPM/OPM

should expand by ~50bps to 10.6%/3.2%, while bottom-line is

seen at USD 256mn (+26.7% YoY; 23.9% NPM).

Operating efficiency in OKI stemming from the seaport. The

seaport construction in OKI should be completed in 2020, which

may provide OKI with opportunity to save a portion of its logistics

cost. When the seaport fully operates, OKI will be able to receive

woodchips from other islands by sea (not only by land transport

and usually cheaper costs) and perform direct export sales as most

OKI’s sales go to the export market. Better operating efficiency, we

believe that it may lead to higher OKI’s profitabitly ahead.

132

Stock Information

Bloomberg Ticker TKIM IJ

52-Week High 13,950

52-Week Low 5,575

FY20F P/E 10.5x

FY20F P/BV 1.6x






Upside Potential 9.3%


Revenue 1,056 1,069 1,072 1,079 1,097

% growth 4.4% 1.3% 0.3% 0.6% 1.7%

Gross Profit 115 108 114 115 118

Net Profit 246 202 256 277 278

% growth 667.6% -17.8% 26.7% 8.1% 0.6%

Gross Margin (%) 10.9% 10.1% 10.6% 10.7% 10.7%

Net Margin (%) 23.3% 18.9% 23.9% 25.6% 25.4%

Return on Equity (%) 19.9% 14.3% 15.5% 14.6% 12.9%

Return on Assets (%) 8.3% 6.4% 7.8% 7.9% 7.6%

EPS (USD) 0.079 0.065 0.082 0.089 0.089

133

Pulp and Paper | Tjiwi Kimia Pulp and Paper

(USD Mn) 2018 2019E 2020F 2021F 2022F

Revenue 1,056 1,069 1,072 1,079 1,097

% growth 4.4% 1.3% 0.3% 0.6% 1.7%

COGS (940) (961) (959) (963) (979)

% growth 4.2% 2.2% -0.3% 0.5% 1.7%

Gross Profit 115 108 114 115 118

% growth 5.8% -6.4% 5.4% 1.5% 1.9%


Opex to Sales (%) -7.2% -7.3% -7.4% -7.3% -7.3%

EBIT 40 30 34 37 38

% growth 51.9% -24.1% 14.3% 7.0% 3.5%

EBITDA 132 109 114 112 113

% growth 20.5% -17.4% 4.7% -1.9% 1.5%

Associated Income 230 206 255 273 273

Others (19) (35) (33) (32) (31)

EBT 251 201 256 278 280

% growth 528.8% -19.9% 27.6% 8.4% 0.8%

Tax Benefit (Exp) (5) 1 (0) (1) (2)

Net Income 246 202 256 277 278

% growth 667.6% -17.8% 26.7% 8.1% 0.6%

EPS (USD) 0.079 0.065 0.082 0.089 0.089

(USD Mn) 2018 2019E 2020F 2021F 2022F

Net Income 246 202 256 277 278


Chg. In NWC (193) 174 (38) (25) 17



Chg. in LT Assets (213) (213) (254) (273) (276)

Chg. in LT Liabs 2 (3) 3 (0) 1



Chg. in Debt 129 (14) (71) (65) (77)

Dividends Paid (7) (25) (20) (26) (28)

Others (2) - - - -

CF from Financing 121 (39) (91) (90) (105)

Chg. in Cash 28 162 (74) (66) (39)

Beginning Cash 125 153 315 241 175

Ending Cash 153 315 241 175 136



(USD Mn) 2018 2019E 2020F 2021F 2022F



Inventories 331 274 272 279 281


Total CA 942 941 899 856 804

Fixed Assets 1,033 993 943 897 852

Other Non CA 990 1,203 1,457 1,730 2,006

Total Assets 2,965 3,137 3,298 3,483 3,662

Short Term Debt 455 528 517 509 504

Trade Payables 70 81 75 74 78

Other CL 30 30 30 31 31

Total CL 555 640 622 614 613

Long Term Debt 1,108 1,021 961 904 832

Other Non CL 66 64 67 66 67


Share & APIC 714 714 714 714 714

Retained Earnings 520 698 933 1,184 1,435

Others 1 1 1 1 1

Total Equity 1,235 1,413 1,648 1,899 2,150


2,965 3,137 3,298 3,483 3,662

2018 2019E 2020F 2021F 2022F

Profitability

Gross Margin 10.9% 10.1% 10.6% 10.7% 10.7%


EBITDA Margin 12.5% 10.2% 10.6% 10.3% 10.3%

Net Margin 23.3% 18.9% 23.9% 25.6% 25.4%

Liquidity

Current Ratio (x) 1.7 1.5 1.4 1.4 1.3

Solvency

Debt to Equity (x) 1.3 1.1 0.9 0.7 0.6

Debt to Assets (x) 0.5 0.5 0.4 0.4 0.4

Valuation


Price to Book (x) 2.2 1.9 1.6 1.4 1.3

Key Assumptions

Utilization rate 64.2% 64.7% 65.0% 65.5% 66.0%

Sales Vol Growth

Paper -6.3% 1.4% -0.1% -1.5% 0.1%

Stationery 0.0% 9.4% 1.4% 2.0% 2.0%

Packaging 13.5% 9.2% 0.0% 4.3% 4.2%

Pulp price (USD/ton) 790 610 650 630 630

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Telecommunication Sector A Better Competition Landscape for All

OVERWEIGHT

More reasonable pricing. After telco operators raised their pricing during the Ramadan season, there were some adjustments in 3Q19 and more promotional gimmicks among the telco operators. However, in 4Q19, we have seen a better competition landscape as operators start to increase their price. Indosat has started to increase the pricing of the Yellow package and stop its unlimited package for the new subscribers. Indosat has also simplified its Freedom Internet package. Moreover, TLKM has also increased its pricing across its packages with the new “OMG” data package. The newly introduced OMG offered more data packages at a higher price. Thus, we believe the price increase initiative gave a positive signal to the sector. As always, all of the Big-3 operators are aspiring to keep sustainable pricing to continue going forward. Speaking of profitability, continuing a positive trend on the EBITDA margin improvement, the Big 3 operators aim to maintain the current level of margin until the end of 2019.

Healthier industry outlook. After the SIM card registration process that ended in May 2018, the Big 3 operators in Indonesia have been experiencing a natural cleansing process on their cellular subscribers. SIM card registration has given positive impacts on the industry; 1) a lower churn rate, 2) less starter pack and more renewal packages. These had led to better profitability for operators as renewal packages offer less price discount, while a low churn rate decreases both acquisition and producing costs. Although the sector recorded a decrease in the number of subscribers, the overall cellular ARPU among the operators has been rising since 2Q18. With that being said, despite the loss in the number of subscribers, the quality of the users has improved. In 2019, we have seen the normalization of the subscriber base of the operators. Comparing the market share in subscriber from FY18 to 9M19, TLKM is the only one that gained additional market share, while EXCL and ISAT loss market share.

146


41.042.8

40.539.0

35.5 35.8

42.3

44.842.9

43.8 44.1

32.934.3 34.5 33.9

30.0 30.131.5

32.7 32.834.1

35.3

22.1 23.022.1

20.3

15.617.4

22.2

25.226.5

28.829.7

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

Cellular ARPU (IDR 000)

TLKM EXCL ISAT

54.2%

49.8% 51.0%

46.6%

49.8%

38.2%

47.6%45.2%

50.3%

45.2%

50.8%

35.1%36.6%

38.2%35.5% 36.1% 36.1% 37.2%

38.9% 38.2% 39.3% 40.3%42.5%

45.7%43.4%

38.8%

34.1%

29.0% 28.8%

21.3%

35.7% 36.4%

42.7%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

EBITDA Margin

TLKM EXCL ISAT


Telecommunication | Sector Outlook

Embracing the future of digitalization. Indonesia is a lucrative market for data services as it has 1) a huge population dominated by the digital-native generation, 2) a rising smartphone penetration as mobile phones are getting cheaper, 3) one of the most active social media users in the world. Internet penetration will grow at a fast rate, supported by rising urbanization and more affordable smartphones. As of 9M19, data traffic from TLKM, EXCL and ISAT combined, rose by 59% YoY to 9.4mn Terabyte. Going forward, we are expecting data traffic to grow more than 30% YoY, supported by the catalysts as mentioned above and the rapid increase in video consumption. In terms of data revenue mix, as of 9M19, EXCL leads with 85.2%, followed by ISAT and TLKM which recorded data revenue mix of 75.8% and 64.0% respectively.

More on tower divestment plan. Recently, ISAT has signed Sales & Purchase Agreements (SPAs) to sell its 3,100 towers with a total transaction of IDR 6.4tn (implying ~IDR 2.1bn/tower). By looking at tower divestment in the past, the price was above the range of IDR 1.43-1.63bn/tower. On the other hand, EXCL is also planning to divest 4,500 towers in 2020. In short, we believe the tower divestment plan, if completed, should give a positive impact to operators’ bottom-line as they recorded a gain from the tower sale which is most likely will be amortized within the leaseback period.

147

A cheaper tower lease contract renewal. The Big-3 operators will have a portion of the contract renewal on tower lease going forward. The good news is that the renewal rate for the tower lease would be significantly lower than the previous contract price. As of now, the market price for tower lease is around IDR 12-13mn/tower/month. Being said that, the Big-3 operator can save up to ~30-40% of their previous contract price. By looking at this, we can expect telco operators to have a quite significant cost saving and thus improved profitability. PSAK 73 impact on Indonesia telecommunication operators. PSAK 73, an adoption product of IFRS 16: Leases will be implemented starting on 1 January 2020 in Indonesia. Under PSAK 73, operating leases are treated similarly as finance leases—that is, the lessee is required to recognize all of its leases on the balance sheet (assets under finance lease and lease payable). In the income statement, the company reports interest expense and depreciation expense. We view that the adoption of PSAK 73 has a positive effect on EBITDA as operating lease expense is reclassified as depreciation expense and interest expense. ISAT has followed the PSAK 73 since Ooredoo has implemented IFRS 16 on 1 Jan 19. The company said that the change in accounting has resulted in an increased GPM margin of ~3%. For TLKM and EXCL which have not implemented this, further looking on the PSAK 73 implementation and its impact is needed. EBITDA margin could improve by the change in accounting, but the balance sheet could stretch on higher debt recognized. Conclusion and stock pick. All in all, we upgrade our recommendation on telecommunication sector from NEUTRAL to OVERWEIGHT. We believe that the sector will have good earnings growth going forward, supported by a healthier competition environment and growth from mobile data revenues. Overall, we are positive for all of the Big-3 operators. Despite the expected softer earnings in 4Q19, TLKM remains our top picks for the sector as we believe the future growth is still promising. On the other hand, we are also positive for both EXCL and ISAT to continue their better performance in 2020. However, the main downside risk to our call includes aggressive competition which will harm the overall industry.

Ticker Rating CP TP % Chg FY20F EV/EBITDA

TLKM BUY 3,990 4,950 24.1 7.0

EXCL ADD 3,240 3,650 12.7 4.3

ISAT ADD 3,120 3,600 15.4 5.4

Telecommunication Sector

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

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Data Traffic (Tb)

TLKM EXCL ISAT



48% 49% 49% 50% 50% 50% 50% 49% 49% 49% 48%

31% 31% 32% 31% 31% 32% 32% 31% 30% 30% 30%

21% 20% 19% 19% 19% 19% 18% 20% 20% 21% 22%

-

50

100

150

200

250

300

350

400

450

500

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19

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s

BTS Market Share

TLKM EXCL ISAT Total BTS


PT Telekomunikasi Indonesia Tbk.

BUY

Remain positive with a BUY recommendation for TLKM with a 52-week target price of IDR 4,950. Our target price is derived from EV/EBITDA multiples valuation at 7.0x, equivalent to its five years historical average. Despite the concern of weaker than expected earnings in 4Q19, we remain positive that TLKM would have a decent growth next year, supported by healthier competition landscape, growing mobile data revenues, and rising fixed broadband penetration. Moreover, we believe that TLKM has competitive advantages of domination in infrastructure, a superior network quality, and distinct customer profiles. However, the risk to our call is a significant drop in pricing across the telco industry. Signaling a positive trend in the cellular business. Despite the negative trend on data yield that persists, Telkomsel’s ARPU is slowly climbing up since the SIM card registration process that was completed in 2Q18. ARPU was recorded at IDR 43.3k in 9M19 (vs 36.6k in 6M18 and 43.1k in 2Q19). Going forward, TLKM aspires to keep increasing its ARPU, which is supported by 4G and legacy-to-data migration on its part of 111.2mn data users (66.3% of the total subscriber) which will lead to 30% higher data consumption. On the other hand, TLKM successfully gained back cellular subscribers in 3Q19, and maintain its dominance in the market share with 170.9mn subscribers (60%). Moreover, with the recent price increase through the new “OMG” data package, we believe the price increase initiative could give a positive signal to the sector. IndiHome is set for continuous growth. TLKM’s consumer segment is now contributed more than 10% of its total revenue and has a promising outlook. The total expected market for fixed broadband is 25mn household, and it experiences less business competition. As of 9M19, Indihome’s subscribers have reached 6.5mn (+1.4mn YTD, +38.3% YoY), with revenue growth of 52.1% YoY amounted to IDR 13.7tn. For 2019, TLKM sets a target to increase its subscribers to 7.0mn and expects to add another 1.5mn user in 2020. With the rapid growth of subscribers each year and a promising business outlook, we believe IndiHome will be a strong growth engine of TLKM towards digitalization.

148

Stock Information

Bloomberg Ticker TLKM IJ

52-Week High 4.500

52-Week Low 3,480

FY20F EV/EBITDA 7.0x

FY20F P/BV 4.5x




Current Price 3,990


% Change 24.1%


Revenue 130.8 136.8 150.4 162.3 173.8

% growth 2.0% 4.6% 10.0% 7.9% 7.1%

EBITDA 59.2 64.3 73.4 81.0 88.7

% growth -8.4% 8.7% 14.2% 10.3% 9.5%

Net Profit 18.0 20.3 23.4 26.3 29.5

% growth -18.6% 12.7% 15.2% 12.2% 12.3%

EBITDA Margin 45.3% 47.0% 48.8% 49.9% 51.1%

Net Margin 13.8% 14.9% 15.6% 16.2% 17.0%

EPS (IDR) 182 205 236 265 298

EV/EBITDA (x) 8.7 8.0 7.0 6.4 5.8

149


Balance Sheet Ratio Analysis & Key Assumptions

Telecommunication | Telekomunikasi Indonesia

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Revenue 130.8 136.8 150.4 162.3 173.8

% growth 2.0% 4.6% 10.0% 7.9% 7.1%

Operation exp (43.8) (43.0) (46.9) (50.2) (52.8)

Dep & Amo. exp (21.4) (22.9) (24.9) (26.5) (28.2)

Personal exp (13.2) (13.2) (13.8) (14.4) (15.1)

Interconnection exp (4.3) (5.6) (4.6) (3.9) (3.6)

G&A exp (6.1) (6.5) (6.8) (7.3) (7.8)

Marketing exp (4.2) (4.2) (5.0) (5.4) (5.7)

Operating Profit 37.8 41.4 48.5 54.5 60.6

Other income/exp 1.1 0.1 0.1 0.1 0.1

EBIT 38.9 41.5 48.6 54.6 60.6

EBITDA 59.2 64.3 73.4 81.0 88.7

Finance income(exp) (2.5) (2.8) (2.7) (2.3) (1.9)

EBT 36.4 38.7 45.9 52.3 58.7

Tax (9.4) (9.7) (11.5) (13.1) (14.7)

NCI (8.9) (8.7) (11.0) (12.9) (14.5)

Net Profit 18.0 20.3 23.4 26.3 29.5

% growth -8.4% 8.7% 14.2% 10.3% 9.5%

% growth -18.6% 12.7% 15.2% 12.2% 12.3%

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Net Income 18.0 20.3 23.4 26.3 29.5

Dep & Amo 1.4 12.3 13.6 14.5 15.5

Chg. in NWC (5.4) 6.9 3.6 1.6 1.2

CF from Operating 14.0 39.5 40.6 42.4 46.3

Capital Expenditure (13.2) (21.3) (20.0) (19.8) (19.2)

Chg. in LT Assets 2.6 (3.1) (0.3) (0.3) (0.3)

Chg in LT Liabilities (4.1) 3.8 0.3 0.2 0.2

CF from Investing (17.5) (22.3) (21.9) (22.2) (21.7)

Chg. in Share & APIC (2.6) - - - -

Chg. in Bank Loans 8.6 6.2 (5.8) (7.2) (7.3)

Dividends Paid (16.9) (16.2) (16.3) (18.7) (21.0)

Others 6.6 (4.0) 1.0 1.1 1.2

CF from Financing (4.2) (14.0) (21.0) (24.9) (27.1)

Change in Cash (7.7) 3.2 (2.3) (4.7) (2.5)

Beginning Cash 25.1 17.4 20.7 18.4 13.7

Ending Cash 17.4 20.7 18.4 13.7 11.2

(IDR Tn) 2018 2019E 2020F 2021F 2022F

Cash & equivalents 17.4 20.7 18.4 13.7 11.2

Trade receivables 11.4 13.1 11.8 12.7 13.8

Other CA 14.4 13.0 14.4 15.6 16.2

Total CA 43.3 46.8 44.6 42.0 41.2

PPE 143.2 153.8 162.1 169.4 175.5

Other LT assets 19.7 22.9 23.3 23.7 24.0

Total Assets 206.2 223.5 229.9 235.1 240.7

Payables 16.4 21.0 23.0 24.9 26.2

Short-term loans 10.3 10.3 14.7 11.8 17.3

Other CL 19.5 22.1 23.8 25.5 27.2

Total CL 46.3 53.4 61.5 62.3 70.7

Long term-loans 33.7 40.0 29.8 25.5 12.7

Other 8.9 12.7 13.0 13.2 13.4


Share & APIC 7.4 7.4 7.4 7.4 7.4

Retained earnings 91.0 95.1 102.2 109.8 118.3

NCI 18.4 14.5 15.5 16.5 17.7

Other 0.5 0.4 0.4 0.4 0.4

Total Equity 117.3 117.4 125.5 134.1 143.8

Total Equity & Liabilities 206.2 223.5 229.9 235.1 240.7

2018 2019E 2020F 2021F 2022F

Profitability

ROE 15.4% 17.3% 18.7% 19.6% 20.5%

ROA 8.7% 9.1% 10.2% 11.2% 12.3%

EBITDA Margin 45.3% 47.0% 48.8% 49.9% 51.1%



Current Ratio 0.9 0.9 0.7 0.7 0.6

Debt to Equity 0.4 0.4 0.4 0.3 0.2

Debt to Assets 0.2 0.2 0.1 0.1 0.1

Valuation


Price to Book (PBV) 5.0 4.8 4.5 4.2 3.9

EV/EBITDA 8.7 8.0 7.0 6.4 5.8

Key Assumptions

Cellular Subs (Mn) 163.0 171.1 176.3 181.6 187.0

Cellular ARPU (000) 43.3 42.1 44.0 44.7 44.7

Data Subs (Mn) 106.6 113.0 119.0 125.3 130.9

Data Yield (IDR 000/Gb) 10.3 8.1 7.3 6.7 6.4


PT XL Axiata Tbk.

ADD

We upgrade our recommendation for EXCL from NEUTRAL to ADD with a 52-week target price of IDR 3,650. Our target price is derived from EV/EBITDA multiples valuation at 5.4x, equivalent to –0.25 STD to its 5 years historical average. We remain positive for EXCL to maintain its stable performance in a healthier industry outlook. With the continuous focus, consistent execution of data-led strategy and the dual-brand strategy, EXCL should continue its growth momentum to 2020. However, we are cautious about the risks of the rising competition and a loss in the market share. Cautiously optimistic outlook. In 3Q19, EXCL continued to show a healthy revenue growth driven by the data revenue (+35% YoY, +7% QoQ). ARPU was recorded at IDR 36k (+6% QoQ, +10% YoY), which was the 7th quarter where they managed to recorded a continuous QoQ growth. For the EBITDA margin, EXCL also showed a continuous improvement, as of 9M19, EBITDA margin stood at 39.3% (vs 36.5% in 9M18). Moreover, EXCL management, on its last earnings call, indicates a more positive tone for 2019 result. EXCL raised its EBITDA margin estimation to close to 40%. EXCL also said that there was an easing in price competition in 4Q19, proven by TLKM and ISAT which also raise their pricing. However, EXCL recorded a decrease of 1.1mn subscribers in 3Q19, a loss in lower-value customers, which was a result of intensifying competition during the period. We believe further monitoring on EXCL subscribers is crucial. Some ex-Java markets are improving. XL Axiata started to invest in ex -Java markets since 2016. As of now, EXCL expects that it has captured a low-single-digit market share on ex-Java (~10%-11%). Although overall ex-Java is still not profitable, revenue growth in some areas has exceeded EXCL expectation and already moved into the profit zone. Capex wise, EXCL allocated IDR 7.5tn in 2019 which mostly focused on 4G network investment and fiberizing more sites, with the allocation that will be more concentrated on ex-Java. Going forward, EXCL also plans to sell 4,500 towers. We are of the view that the tower sale will positively impact EXCL’s finance. Fresh cash could support future capex plan, reduce debt and improve profitability from the gain on the sales.

150

Stock Information

Bloomberg Ticker EXCL IJ

52-Week High 3,730

52-Week Low 1,930


FY20F P/BV 1.9x




Current Price 3,240


% Change 12.7%


Revenue 22,939 25,561 27,703 29,677 31,378

% growth 0.3% 11.4% 8.4% 7.1% 5.7%

EBITDA 8,512 10,297 11,386 11,955 12,163

% growth 2.3% 21.0% 10.6% 5.0% 1.7%

Net Profit (3,297) 856 1,244 1,277 1,313

% growth -978.6% -126.0% 45.3% 2.7% 2.8%

EBITDA Margin (%) 37.1% 40.3% 41.1% 40.3% 38.8%

Net Margin (%) -14.4% 3.3% 4.5% 4.3% 4.2%

EPS (IDR) (308.5) 80.1 116.4 119.5 122.8

EV/EBITDA 7.2 6.0 5.4 5.2 5.1

151


(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 22,939 25,561 27,703 29,677 31,378

% growth 0.3% 11.4% 8.4% 7.1% 5.7%

Dep & amor exp (11,621) (7,305) (7,800) (8,282) (8,792)

Infra exp (8,453) (9,581) (10,525) (11,505) (12,563)

Interconnection exp (2,421) (1,931) (1,715) (1,821) (1,959)

Salaries exp (1,037) (1,283) (1,415) (1,556) (1,711)

Sales and marketing exp (2,039) (1,917) (2,078) (2,226) (2,353)

G&A exp (476) (552) (586) (615) (630)

Operating Profit (3,109) 2,993 3,586 3,673 3,371

Other income/exp (29) 473 423 423 423

EBIT (3,138) 3,465 4,009 4,096 3,794

EBITDA 8,512 10,297 11,386 11,955 12,163

% growth 2.3% 21.0% 10.6% 5.0% 1.7%

Finance income (exp) (1,259) (2,277) (2,350) (2,393) (2,043)

EBT (4,396) 1,188 1,658 1,703 1,750

Tax 1,099 (333) (415) (426) (438)

Net profit (3,297) 856 1,244 1,277 1,313

% growth -978.6% -126.0% 45.3% 2.7% 2.8%

EPS (IDR) N/A 80.1 116.4 119.5 122.8



Telecommunication | XL Axiata

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income (3,297) 856 1,244 1,277 1,313

Dep & Amo 11,208 7,305 7,800 8,282 8,792

Chg. in NWC 849 69 314 635 469



Chg. in LT Assets 263 222 (566) (36) (73)

Chg in LT Liabilities (1,229) (214) 87 280 140


Chg. in Share & APIC (8) 8 - - -

Chg. in Bank Loans 3,673 2,269 (1,322) (2,038) (597)

Dividends Paid - - - - -

CF from Financing 3,682 2,276 (1,322) (2,038) (597)

Change in Cash (1,408) 290 (60) 981 2,199

Beginning Cash 2,455 1,047 1,337 1,276 2,257

Ending Cash 1,047 1,337 1,276 2,257 4,456

(IDR Bn) 2018 2019E 2020F 2021F 2022F


Trade receivables 632 700 751 814 858

Other CA 5,380 4,201 4,649 5,167 5,542

Total CA 7,059 6,238 6,677 8,238 10,856

PPE 36,760 39,712 39,563 38,733 37,818

Other LT assets 13,796 13,541 14,074 14,077 14,117

Total Assets 57,614 59,491 60,314 61,048 62,791

Payables 9,159 7,966 8,480 9,357 9,996

Short-term loans 1,329 4,776 400 677 4,849

Other CL 5,245 5,340 6,347 5,425 5,676

Total CL 15,733 18,082 15,226 15,459 20,522

Long term-loans 11,235 7,459 9,059 7,882 3,033

Other 12,303 14,744 15,578 15,980 16,196


Share & APIC 13,218 13,226 13,226 13,226 13,226


Total Equity 18,343 19,206 20,450 21,727 23,040

Total Equity & Liabilities 57,614 59,491 60,314 61,048 62,791

2018 2019E 2020F 2021F 2022F

Profitability

ROE -18.0% 4.5% 6.1% 5.9% 5.7%

ROA -5.7% 1.4% 2.1% 2.1% 2.1%

EBITDA Margin 37.1% 40.3% 41.1% 40.3% 38.8%

Net profit margin -14.4% 3.3% 4.5% 4.3% 4.2%


Current Ratio 0.4 0.3 0.4 0.5 0.5

Debt to Equity 0.6 0.6 0.4 0.4 0.3

Debt to Assets 0.2 0.2 0.1 0.1 0.1

Valuation

Price to Earning (PE) - 45.6 31.4 30.5 29.7

Price to Book (PBV) 2.1 2.0 1.9 1.8 1.7

EV/EBITDA 7.2 6.0 5.4 5.2 5.1

Key Assumptions

Cellular Subs (Mn) 54.9 56.4 58.1 59.9 61.7

Cellular ARPU (000) 30.5 34.5 36.2 37.7 38.7

Data Subs (Mn) 45.0 50.2 52.3 54.5 56.7

Data Yield (IDR 000/ 6.8 5.8 5.3 5.2 5.1


PT Indosat Ooredoo Tbk.

ADD

We upgrade our recommendation for PT Indosat Ooredoo Tbk. (ISAT) from NEUTRAL to ADD with a 52-week target price of IDR 3,600. Our target price is derived from EV/EBITDA multiples valuation at 4.3x, equivalent to –0.25 STD to its 5 years historical average. We do favor the potential turnaround story of ISAT which was signed by the net adds on subscribers and improvement on its operational matrix. Despite the constraint on its balance sheet that limits its potential to expand, the option of tower sale could be a positive catalyst as it provides capital and a gain on sale. However, the main risk to our call is the aggressive pricing strategy across the telco industry. Operating matrix continues to improve. Indosat successfully recorded its 2nd streak of net adds on its cellular subscribers. In 3Q19, Indosat’s cellular subscribers increased by 2.1mn to a total of 58.8mn, passing EXCL subscribers and it now holds the second largest market share after TLKM. As of 9M19, data traffic grew strongly at a rate of 72% YoY. EBITDA grew by 40.7% YoY to IDR 7.2tn for 9M 2019, with EBITDA margin stood at 38.4%. In 4Q19, Indosat has started to increase the pricing on the Yellow package and stopped its unlimited package for new subscribers, pushing the old users to move to Indosat’s simplified Freedom Internet package. We are of the view that the price increase initiative was positive, which should further improve the company’s profitability. The 3,100 tower sale should be positive. Despite the recent change in Indosat’s CEO, the new management of ISAT continues the plan of US$2bn Capex in the next couple of years. Ex-Java area is still the focus with plans to add more coverage and improve network quality by maintaining intensive 4G network rollout. Lately, Indosat signed a Sales and Purchase Agreements with Mitratel and Protelindo to sell 3,100 towers. The total transaction amount is IDR 6.39 trillion, and to be fully paid in cash, which is anticipated to be completed in December 2019. We are of the view that the tower sale is one of the financing solutions for ISAT. The sales should give a positive impact to ISAT’ bottom-line as they recorded gain from tower sale which will most likely be amortized within the leaseback period.

152

Stock Information

Bloomberg Ticker ISAT IJ

52-Week High 3,950

52-Week Low 1,645


FY20F P/BV 1.0x

Share Outstanding (Mn) 5,434



Current Price 3,120


% Change 15.4%


Revenue 23,140 25,075 26,854 28,771 30,574

% growth -22.7% 8.4% 7.1% 7.1% 6.3%

EBITDA 6,500 9,538 10,788 11,789 12,653

% growth -49.1% 46.7% 13.1% 9.3% 7.3%

Net Profit (2,404) (872) (1,411) (814) (348)

% growth N/A N/A N/A N/A N/A

EBITDA Margin 28.1% 38.0% 40.2% 41.0% 41.4%

Net Margin -10.4% -3.5% -5.3% -2.8% -1.1%

EPS (IDR) - - - - -

EV/EBITDA 7.2 4.9 4.3 4.0 3.7

153


(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 23,140 25,075 26,854 28,771 30,574

% growth -22.7% 8.4% 7.1% 7.1% 6.3%

Cost of services (12,043) (11,834) (11,948) (12,652) (13,372)

Dep & amor exp (8,249) (9,438) (10,015) (10,543) (11,002)

Personnel exp (2,238) (1,728) (2,083) (2,196) (2,317)

Marketing exp (1,229) (1,025) (1,149) (1,225) (1,305)

G & A exp (1,129) (949) (885) (909) (927)

Operating Profit (1,508) 867 915 1,387 1,792

Other income/exp 815 2 - - -

EBIT (692) 869 915 1,387 1,792

EBITDA 6,500 9,538 10,788 11,789 12,653

% growth -49.1% 46.7% 13.1% 9.3% 7.3%

Finance income(exp) (2,089) (2,641) (2,808) (2,537) (2,361)

EBT (2,782) (1,772) (1,893) (1,150) (569)

Tax 578 272 439 254 108

NCI (319) (57) (92) (53) (23)

Net profit (2,522) (1,558) (1,546) (950) (483)

% growth -311.6% -63.7% 61.8% -42.3% -57.3%

EPS (IDR) - - - - -



Telecommunication | Indosat Ooredoo

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income (2,404) (872) (1,411) (814) (348)

Dep & Amo 7,596 9,438 10,015 10,543 11,002

Chg. in NWC 3,901 (303) 522 478 499



Chg. in LT Assets (3,070) (176) (252) (272) (255)




Chg. in Bank Loans 2,310 5,653 (2,080) (2,183) (1,628)

Dividends Paid (397) - - - -

CF from Financing 2,034 5,693 (2,009) (2,106) (1,556)

Change in Cash (630) 913 (583) 1,061 3,342

Beginning Cash 1,675 1,045 1,958 1,375 2,436

Ending Cash 1,045 1,958 1,375 2,436 5,779

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & equivalents 1.045 1.958 1.375 2.436 5.779

Trade receivables 2.926 3.171 3.396 3.638 3.866

Other CA 3.935 4.029 4.116 4.156 4.233

Total CA 7.907 9.158 8.886 10.230 13.878

PPE 36.899 40.557 38.075 34.465 29.619

Other LT assets 8.334 8.530 8.768 9.012 9.226

Total Assets 53.140 58.245 55.730 53.707 52.723

Payables 927 923 989 1.047 1.102

Short-term loans 7.060 7.124 4.136 5.990 6.371

Other CL 13.053 13.094 13.861 14.563 15.312

Total CL 21.040 21.140 18.986 21.600 22.786

Long term-loans 17.886 23.474 24.382 20.344 18.335


Share & APIC 2.090 2.090 2.090 2.090 2.090

Retained earnings 8.497 7.625 6.214 5.400 5.053

Total Equity 12.136 11.305 9.966 9.228 8.953

Total Equity & Liabilities 53.140 58.245 55.730 53.707 52.723

2018 2019E 2020F 2021F 2022F

Profitability

ROE -19.8% -7.7% -14.2% -8.8% -3.9%

ROA -4.5% -1.5% -2.5% -1.5% -0.7%

EBITDA Margin 28.1% 38.0% 40.2% 41.0% 41.4%

Net profit margin -10.4% -3.5% -5.3% -2.8% -1.1%


Current Ratio 0.4 0.4 0.5 0.5 0.6

Debt to Equity 1.8 2.1 2.2 2.2 2.1

Debt to Assets 0.4 0.4 0.4 0.4 0.4

Valuation

Price to Earning (PE) - - - - -

Price to Book (PBV) 0.9 0.9 1.0 1.1 1.2

EV/EBITDA 5.3 4.1 3.5 2.9 2.3

Key Assumptions

Cellular Subs (Mn) 58.0 59.6 62.0 63.8 65.8

Cellular ARPU (000) 26.7 25.8 26.4 27.3 28.1

Data Subs (Mn) 44.1 45.6 48.3 50.4 52.6

Data Yield (IDR 000/ 6.7 4.5 3.9 3.7 3.6

Tobacco Sector

Valuation is Turning Attractive

OVERWEIGHT

assume that government is currently seeing a

significant industry volume decline up to 10% YoY next

year. We believe this unprecedented hike may be a one

-time event due to the absence in 2019. The sector

remains vital as it controls the livelihood of many

stakeholders, especially tobacco farmers. While we see

some may price in extreme excise hike post 2020, we

maintain normal rate of 10-11% for 2021 onwards.

No more affordable cigarettes. Effective as of early

Jan-20, cigarette producers ideally are obligated to

raise their products ASP to at least 85% from the new

HJE to comply with the regulation. We notice that both

HMSP and GGRM will need to raise ASP significantly by

20%-35%, especially for their lower-priced products.

The flagship products, which have already met the

regulation, should see less aggressive ASP hike in our

FY19: Industry outlook getting stable. Based on

Phillip Morris International Data, Indonesia’s cigarette

market has started signaling a stable performance this

year, with volume recorded at 226.3bn sticks (+0.7%

YoY) in 9M19 following limited ASP increases. HMSP

recorded volume of 72.1bn sticks in 9M19, down by

3.2% YoY which was on persisting decline of A Mild and

a faster shift to low price SKM FF category which was

not HMSP’s expertise. On the flip side, GGRM

maintained its robust volume growth trend of ~14% as

of 9M19. Another thing to note from this sector was the

severe depreciation of tobacco players’ share price

throughout the year. Note that by the end of Nov-19,

both HMSP and GGRM’s share has been cut by almost

half, on the back of: 1) free-float weight adjustment for

LQ45 and IDX30 that hurt HMSP the most, 2) ESG

issue, and 3) unprecedented soaring excise tax hike

and minimum cigarette retail selling price for 2020.

The extreme excise tax hike put negativity on the

sector, yet should be a one time event. Ministry of

Finance has set excise tax to increase by blended

average of 23% YoY next year with highest hike

coming from SPM and SKM. In addition, minimum retail

selling price (HJE) is also set elevated by ~42% on

average, whereas SPM and SKM’s are lifted more than

50%. Note that HJE applies as the basis for

government’s VAT collection. This decision is intended

to cut cigarette consumption, control the industry and

preserve government income. The 23% increase in

excise tax is much higher than the adjusted total excise

tax increases of 11% in 2020 state budget, in which we

154

11.2% 10.5% 10.0% 0.0% 23.0%

8.3%

8.1%7.5%

3.3%

19.0%

10.7%

7.2% 5.6%

3.4%

18.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2016 2017 2018 2019E 2020F

Average Excise Tax Hike HMSP ASP Hike (Est.) GGRM ASP Hike (Est.)


Unexpected excise tax hike in 2020

Tobacco | Sector Outlook

will only negatively impact earnings by 1-2%. We still

see potential margins erosion for both HMSP and GGRM

as they may not fully pass on the rising costs to

maintain market share.

Overly punished, valuation is now attractive plus

higher dividend yield. Post the announcement of

excise tax, both HMSP and GGRM’s share have

depreciated sharply by ~25% continuing the de-rating

since early 2019. Despite we agree that de-rating may

happen on the negative industry sentiment, however

we believe both names may have been overly

punished. HMSP and GGRM currently trades at

17.8x/10.8x, below their -2SD from its 3-year average

PE, which we believe may provide attractive entry point

for both names. At current market price, both names

also offer a more attractive dividend yield of 5-6%,

which is almost doubled from their average of 3.2-

3.7%.

Bad news have priced in, upgrade our call to

OVERWEIGHT. Despite all the bad news, we believe

most of them may have already priced in seeing the

underperformance of both HMSP and GGRM -48%/–

40% YTD. Decline in volume, potential margin pressure

and negative EPS growth for sure may lead for PE de-

rating. However, both names over 2019 have already

seen severe de-rating, which currently is attractive on

valuation perspective. We have BUY for both counters

as attractive potential upside of 15-20% is visible from

current price.

view. However, we view tobacco players may be

reluctant to increase ASP in bulk and will prefer gradual

adjustment to retain market share. Let alone that

competition for the sector has become increasingly

stringent in recent years.

Lower cigarette consumption. Soaring cigarette

prices that could potentially reach 20% in 2020 may

trigger a risk of sharp industry volume drop. When

cigarette prices rose by only 10-11% per annum in the

period of 2016-2018, a consistent drop in total

Indonesian cigarette market was visible. To add, the

potential dipping consumption level next year on the

back of revocation of electricity subsidies, lower social

spending, the adjustment of BPJS Kesehatan premium

along with moderate 8.51% minimum wage growth

may also pressurize cigarette consumption. This is as

we believe most volume growth in cigarette still comes

from the low to middle income classes. We are now

anticipating for a 10% industry volume decline

although without excluding all those factors above, our

assumption may be more toward the grey sky scenario,

as cigarette products may be sticky to a certain extent.

Consequently, we believe there could be upside risk to

our volume assumption ahead.

Down trading lingers on. Over the last three years,

down trading trend has been observed in the industry.

Correlating to this, consumers have also seen to be

shifting its preference back to SKM FF (or mid to high-

tar) that is generally cheaper than the low-tar ones.

Consequently, those low-price low-margin product will

remain the main boosters for tobacco players. The

recovery in flagship products in our view may be

delayed.

ASP is more sensitive than volume for earnings.

Despite potentially lower volume next year, impact

toward earnings may be offset by higher ASP. Our

finding shows that ASP is more sensitive to earnings

than volume, with every 1% ASP increase will increase

earnings by 5-7% compared to 1% volume drop that

155


HMSP BUY 2,060 2,500 21.4 22.9

GGRM BUY 52,025 60,250 15.8 15.0

Tobacco sector

Source: PMI, Sinarmas Investment Research

Expecting significant industry volume drop

315.6

307.4 307310.7

279.06280.46

-1.5%

-2.6%

-0.1%

1.2%

-10.2%

0.5%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

260

270

280

290

300

310

320

2016 2017 2018 2019E 2020F 2021F

Cigarette Industry Volume YoY Growth


Both HMSP and GGRM trade below -2SD

-

10.0

20.0

30.0

40.0

50.0

60.0

Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19

HMSP GGRM HMSP -2SD GGRM -2SD

Tobacco Sector

PT HM Sampoerna Tbk.

BUY

We raise our NEUTRAL to BUY call on PT HM Sampoerna Tbk

(HMSP) with 52-week target price of IDR 2,500. Our TP


1.5SD from its 3-year average PE) which also implies a 18.9x

forward PE. Despite the negative sentiment of the industry post the

extreme excise tax coupled with HJE hike, we believe all the bad

news have already priced in the significant de-rating of HMSP

throughout 2019. Downside risks to our call are another round of

extreme excise tax hike after 2020 and worse-than-expected

volume and continuing market share drop.

Expecting industry volume drop. With the significant rise in

2020 excise tax hike and HJE, we are now anticipating a 10% YoY

cigarette volume decline in the industry, leading to total Indonesia

cigarette market of 279bn sticks (based on Phillip Morris

International data). Our assumption should be more toward the

worst case scenario as people will still consume cigarette, yet

leaving the probability of lower consumption.

HMSP’s earnings outlook. For HMSP, we assume FY20F volume

to drop in-line with industry’s 10% YoY totaling 88.8bn sticks (from

2.7% decline in FY19E) with ASP to rise by 19% (vs 3.3% in

FY19E). As a result, top-line will still grow by 7.1% YoY to IDR

115.0tn on higher ASP although EPS will drop by 11.7% YoY on

margin erosion. Our numbers show a decline of 260/240bps in

HMSP’s FY20F GPM/NPM to 22.1%/11%.

“A Mild” recovery may be on hold. In 2019, HMSP launched new

product “A Mild Splash” to bring back its glory in the SKM LTLN

following the continuously decline in “A Mild”. As we see the

downtrading and shift back to SKM FF will persist in the upcoming

years, we believe it may be ineffective and the SKM FF popular

brands such as Magnum Mild, Phillip Morris Bold and Malboro Filter

Black will remain the key products in the upcoming years.

Undemanding valuation coupled with attractive dividend

yield. HMSP currently trades at 17.8x PE (below -2SD from its 3-

year average) and provides 5.3% FY20F dividend yield.

156

Stock Information

Bloomberg Ticker HMSP IJ

52-Week High 4,080

52-Week Low 1,900

FY20F P/E 22.9x

FY20F P/BV 8.4x




Current Price 2,060


% Change 21.4%


Revenue 106,742 107,358 114,971 125,583 136,238

% growth 7.7% 0.6% 7.1% 9.2% 8.5%

Gross Profit 25,491 26,460 25,353 27,443 29,277

Net Profit 13,538 14,375 12,693 13,563 14,157

% growth 6.8% 6.2% -11.7% 6.9% 4.4%

Gross Margin (%) 23.9% 24.6% 22.1% 21.9% 21.5%

Net Margin (%) 12.7% 13.4% 11.0% 10.8% 10.4%

Return on Equity (%) 39.0% 40.2% 36.0% 38.9% 39.7%

Return on Assets (%) 30.2% 31.3% 28.4% 30.2% 30.4%

EPS (IDR) 116 124 109 117 122

157

Tobacco | HM Sampoerna


(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 106,742 107,358 114,971 125,583 136,238

% growth 7.7% 0.6% 7.1% 9.2% 8.5%

COGS (81,251) (80,898) (89,619) (98,139) (106,961)

% growth 8.5% -0.4% 10.8% 9.5% 9.0%

Gross Profit 25,491 26,460 25,353 27,443 29,277

% growth 5.3% 3.8% -4.2% 8.2% 6.7%


Opex to Sales (%) -8.1% -8.1% -8.4% -8.4% -8.5%

Other Inc (Exp) 106 - - - -

EBIT 16,988 17,767 15,677 16,930 17,759

% growth 5.5% 4.6% -11.8% 8.0% 4.9%

EBITDA 17,962 18,453 16,416 17,701 18,548

% growth 5.7% 2.7% -11.0% 7.8% 4.8%

Net Financing 973 1,305 1,162 1,064 1,117

EBT 17,961 19,072 16,840 17,994 18,875

% growth 6.3% 6.2% -11.7% 6.9% 4.9%

Tax Expenses (4,423) (4,696) (4,147) (4,431) (4,719)

Net Income 13,538 14,375 12,693 13,563 14,157

% growth 6.8% 6.2% -11.7% 6.9% 4.4%

EPS (IDR) 116 124 109 117 122

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 13,538 14,375 12,693 13,563 14,157


Chg. In NWC 6,675 (2,992) (518) (1,838) 283


Capital Expenditure (1,372) (228) (672) (485) (384)

Chg. in LT Assets 587 274 119 23 (2)

Others (95) 116 213 248 275

CF from Investing (879) 163 (339) (214) (112)



Dividends Paid (12,390) (13,616) (14,361) (12,680) (13,550)

Others - - - - -


Chg. in Cash 8,015 (1,384) (1,787) (398) 1,568

Beginning Cash 7,502 15,516 14,133 12,346 11,948

Ending Cash 15,516 14,133 12,346 11,948 13,516


(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 15,183 15,271 16,354 17,863 19,379


Total CA 37,831 37,192 36,237 38,240 40,086

Fixed Assets 7,288 6,830 6,763 6,476 6,072

Other Non CA 1,483 1,208 1,089 1,066 1,068

Total Assets 46,602 45,230 44,089 45,783 47,226

Short Term Debt - - - - -

Trade Payables 3,450 3,758 4,260 4,692 5,121

Taxes Payable 1,688 1,792 1,582 1,691 1,801

Other CL 3,656 996 1,017 1,039 1,062

Total CL 8,794 6,545 6,860 7,423 7,984

Other Non CL 2,450 2,566 2,779 3,027 3,302


Share & APIC 21,011 21,011 21,011 21,011 21,011


Others 616 616 616 616 616

Total Equity 35,358 36,118 34,450 35,333 35,940


46,602 45,230 44,089 45,783 47,226

2018 2019E 2020F 2021F 2022F

Profitability

Gross Margin 23.9% 24.6% 22.1% 21.9% 21.5%


EBITDA Margin 16.8% 17.2% 14.3% 14.1% 13.6%

Net Margin 12.7% 13.4% 11.0% 10.8% 10.4%

Liquidity

Current Ratio (x) 4.3 5.7 5.3 5.2 5.0

Quick Ratio (x) 2.2 2.7 2.3 2.1 2.0

Solvency

Debt to Equity (x) 0.0 0.0 0.0 0.0 0.0

Interest Cov. (x) na na 0.0 0.0 0.0

Valuation


Price to Book (x) 8.2 8.1 8.4 8.2 8.1

Key Assumptions

Volume (Bn Sticks) 101.4 98.6 88.8 89.3 89.8

% growth 0.1% -2.7% -10.0% 0.6% 0.5%

Blended ASP Est. 1,044 1,078 1,284 1,395 1,518

% growth 7.9% 3.3% 19.0% 8.7% 8.8%

Market Share 33.0% 31.8% 31.8% 31.8% 31.8%

Tobacco Sector

PT Gudang Garam Tbk.

BUY

We upgrade our NEUTRAL call to BUY on PT Gudang Garam

Tbk (GGRM) with 52-week target price of IDR 60,250. Our TP


1.25SD from its 3-year average PE). Despite the negative

sentiment of the industry post the extreme excise tax coupled with

HJE hike, we believe that all the bad news have already priced in

the significant de-rating of GGRM throughout 2019. Downside risks

to our call are another round of extreme excise tax hike after 2020

and worse-than-expected volume.

Industry volume decline is visible. Due to the significant rise in

excise tax and HJE, we are now assuming 10% YoY industry

cigarette volume decline in 2020. We believe our number is more

toward the grey sky scenario due to the stickiness of cigarette

products. For GGRM, we only assume a 6% decline in volume,

better than the industry considering 1) a strong equity brand for

the low to middle income class, 2) the continuing preference on

SKM FF category which is GGRM’s expertise. This drop would be the

first for GGRM in since 2017, as on average GGRM posted a volume

growth of ~8% for 2017-2019E period.

GGRM’s earnings outlook. Applying our volume assumption with

18.2% ASP increase, we now identify GGRM’s FY20F top-line to

grow by 8.8% YoY. Net profit is expected to observe steep decline

of 19.7% YoY, bringing it close to the 2017-2018’s level on the

reluctancy to aggressively raising ASP. This is as in the last 3

years, we see GGRM’s focus was more toward market share than

profitability. Correspondingly, we forecast GPM/NPM to dip to

16.6%/6.4% in FY20F.

Undemanding valuation coupled with an attractive dividend

yield. Post the significant de-rating, GGRM currently trades at

10.8x PE (below -2SD from its 3-year average). Assuming FY20F

dividend at IDR 2,600/share which is similar to the past 4 years,

we arrive at 5.0% dividend yield. Even so, with significant FY19E

net profit growth of 23.2% YoY, there may be upside risk to our

forecasted dividend yield.

158

Stock Information

Bloomberg Ticker GGRM IJ

52-Week High 100,975

52-Week Low 49,175

FY20F P/E 15.0x

FY20F P/BV 2.2x






Upside Potential 15.8%


Revenue 95,708 108,833 120,719 131,393 142,420

% growth 14.9% 13.7% 10.9% 8.8% 8.4%

Gross Profit 18,644 21,505 20,033 21,702 23,674

Net Profit 7,792 9,596 7,707 8,316 8,809

% growth 0.5% 23.2% -19.7% 7.9% 5.9%

Gross Margin (%) 19.5% 19.8% 16.6% 16.5% 16.6%

Net Margin (%) 8.1% 8.8% 6.4% 6.3% 6.2%

Return on Equity (%) 17.8% 20.2% 15.1% 15.4% 15.3%

Return on Assets (%) 11.5% 13.3% 9.9% 10.0% 10.0%

EPS (IDR) 4,050 4,987 4,005 4,322 4,578

159

Tobacco | Gudang Garam



(IDR Bn) 2018 2019E 2020F 2021F 2022F



Inventories 38,560 43,024 48,043 51,594 56,043


Total CA 45,285 49,973 55,673 60,414 64,834

Fixed Assets 22,759 23,838 23,723 23,663 23,701

Other Non CA 1,054 1,338 1,704 1,639 1,846

Total Assets 69,097 75,149 81,100 85,717 90,380

Short Term Debt 17,322 17,822 19,822 20,322 20,322

Trade Payables 1,130 1,280 1,476 1,608 1,740

Taxes Payable 135 160 257 277 294

Other CL 3,552 3,891 4,702 5,199 5,630

Total CL 22,004 22,994 26,000 27,129 27,693

Other Non CL 1,960 2,429 2,670 2,843 3,137


Share & APIC 1,016 1,016 1,016 1,016 1,016


Others (33) (33) (33) (33) (33)

Total Equity 45,133 49,727 52,431 55,744 59,551


69,097 75,149 81,100 85,717 90,380

2018 2019E 2020F 2021F 2022F

Profitability

Gross Margin 19.5% 19.8% 16.6% 16.5% 16.6%


EBITDA Margin 14.0% 14.4% 10.9% 10.6% 10.5%

Net Margin 8.1% 8.8% 6.4% 6.3% 6.2%

Liquidity

Current Ratio (x) 2.1 2.2 2.1 2.2 2.3

Quick Ratio (x) 0.2 0.2 0.2 0.2 0.2

Solvency

Debt to Equity (x) 0.4 0.4 0.4 0.4 0.3

Debt to Assets (x) 0.3 0.2 0.2 0.2 0.2

Interest Cov. (x) 16.5 19.5 14.9 15.0 10.6

Valuation


Price to Book (x) 2.6 2.3 2.2 2.1 1.9

Key Assumptions

Volume (Bn Sticks) 85.2 93.8 88.2 88.6 89.1

% growth 8.3% 10.2% -6.0% 0.5% 0.5%

Blended ASP Est. 1,103 1,141 1,349 1,463 1,579

% growth 5.6% 3.4% 18.2% 8.4% 8.0%

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 95,708 108,833 120,719 131,393 142,420

% growth 14.9% 13.7% 10.9% 8.8% 8.4%

COGS (77,063) (87,328) (100,687) (109,691) (118,746)

% growth 18.4% 13.3% 15.3% 8.9% 8.3%

Gross Profit 18,644 21,505 20,033 21,702 23,674

% growth 2.3% 15.3% -6.8% 8.3% 9.1%


Opex to Sales (%) -7.9% -7.5% -7.6% -7.6% -7.6%

Other Inc (Exp) 64 170 139 132 177

EBIT 11,157 13,487 11,015 11,878 12,965

% growth -0.7% 20.9% -18.3% 7.8% 9.2%

EBITDA 13,358 15,657 13,130 13,937 14,927

% growth 1.3% 17.2% -16.1% 6.2% 7.1%

Net Financing (678) (692) (739) (789) (1,219)

EBT 10,479 12,794 10,276 11,088 11,745

% growth 0.4% 22.1% -19.7% 7.9% 5.9%

Tax Expenses (2,686) (3,199) (2,569) (2,772) (2,936)

Net Income 7,793 9,596 7,707 8,316 8,809

% growth 0.5% 23.1% -19.7% 7.9% 5.9%

EPS (IDR) 4,050 4,987 4,005 4,322 4,578

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 7,792 9,596 7,707 8,316 8,809


Chg. In NWC 855 (3,921) (4,760) (3,503) (4,216)



Chg. in LT Assets 533 (284) (367) 65 (207)

Others 481 - - - -



Chg. in Debt (3,278) 500 2,000 500 -

Dividends Paid (5,003) (5,003) (5,003) (5,003) (5,003)

Others 172 469 241 173 293


Chg. in Cash (295) 278 (67) 610 (360)

Beginning Cash 2,329 2,034 2,312 2,245 2,855

Ending Cash 2,034 2,312 2,245 2,855 2,495

160

This page is intentionally left blank

161

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Miscellaneous Sector

PT Blue Bird Tbk.

BUY

We maintain our BUY recommendation on PT Blue Bird Tbk.

(BIRD) with 52-week target price of IDR 3,500. Our TP

provides 21.1% upsides and implies 22.0x/19.0x FY20F/FY21F PE.

Due to several one-off demonstrations in 9M19, we believe

earnings have bottomed and we expect earnings recovery

momentum to play out from FY20 onwards. Rising utilization rate,

easing competition with online ride-hailing, increasing tariff, and

gradual impact from IoT investment will drive earnings in years

ahead. We forecast BIRD’s earnings to grow by 15% CAGR in the

next five years along with steady improvement in margin.

Downside risks to our call are lower than expected utilization rate

and rising fuel price.

Path to recovery. We believe BIRD earnings have bottomed in

9M19 (NPAT at IDR 229 bn, -31% YoY) after a series of unexpected

events this year that hampered its top-line growth (decline in

domestic airline passenger and several demonstrations). FY20

should set a smooth track for earnings to recover in years ahead

supported by higher utilization rate (69% in FY20 vs 67% in FY19),

easing competition with online ride-hailing, and implementation of

even-odd extension policy. In addition, recent 6% tariff hike for

Jakarta area gives a significant positive catalyst that could boost

earnings next year. Non-taxi business should also provide solid

growth ahead supported by Cititrans rapid expansion to several

other routes. We forecast BIRD’s earnings to jump by 24% next

year (due to low base in FY19) with steady 15% CAGR growth for

the next five years.

Stake acquisition plan by Go-jek. Bloomberg recently reported

that Go-jek is nearing an agreement with the company to purchase

5% stake on BIRD for USD 30 mn. This implies a valuation of IDR

3,420 price per share, 2% below our current target price. We view

the stake acquisition to be a positive catalyst for the stock as it

should provide further synergies and new paths for collaboration

between the two.

Valuation. Our target price of IDR 3,500 per share is derived from

DCF based valuation (11% WACC and 4% terminal growth). BIRD

is currently trading at 18.0x/15.6x FY20F/FY21F forward PE.

164

Stock Information

Bloomberg Ticker BIRD IJ

52-Week High 3,550

52-Week Low 1,960

FY20F P/E 22.0x

FY20F P/BV 1.3x




Current Price 2,890


% Change 21.1%


Revenue 4,219 4,084 4,341 4,658 4,977

% growth 0.4% -3.2% 6.3% 7.3% 6.9%

Gross Profit 1,180 1,139 1,282 1,424 1,560

Net Profit 457 325 402 463 521

% growth 7.6% -28.9% 23.6% 15.3% 12.4%

Gross Margin (%) 28.0% 27.9% 29.5% 30.6% 31.3%

Net Margin (%) 10.8% 8.0% 9.3% 9.9% 10.5%

Return on Equity (%) 8.7% 6.0% 7.0% 7.7% 8.2%

Return on Assets (%) 6.8% 4.8% 5.7% 6.3% 6.6%

EPS 183 130 161 185 208

165



Miscellaneous | Blue Bird

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Cash & Equivalents 797 958 1,259 1,635 2,066


Other Current Asset 32 31 33 36 38

Total CA 1,064 1,228 1,546 1,942 2,395

Fixed assets 5,395 5,257 5,193 5,175 5,153

Other 220 241 267 287 292

Total Assets 6,680 6,726 7,005 7,404 7,840

Trade payables 83 82 87 93 99

Short Term Loans 211 163 152 163 174

Other CL 99 96 102 110 117

Total CL 393 341 341 366 390

Long Term Loans 422 327 304 326 348

Other 634 613 652 700 748


Share & APIC 2,763 2,763 2,763 2,763 2,763


NCI 78 80 83 86 89

Total Equity 5,231 5,445 5,708 6,012 6,354


6,680 6,726 7,005 7,404 7,840

2018 2019E 2020F 2021F 2022F

Profitability

ROE 8.7% 6.0% 7.0% 7.7% 8.2%

ROA 6.8% 4.8% 5.7% 6.3% 6.6%

Gross Margin 28.0% 27.9% 29.5% 30.6% 31.3%



Liquidity

Current Ratio 2.7 3.6 4.5 5.3 6.1

Debt to Equity 0.1 0.1 0.1 0.1 0.1

Debt to Assets 0.1 0.1 0.1 0.1 0.1

Valuation


Price to Book (PBV) 1.3 1.3 1.3 1.2 1.1

Key Assumptions

Utilization rate 67% 67% 69% 70% 70%

Avg fleet operational 15,434 15,330 15,996 15,997 15,998

Avg revenue (car/day) 624,420 627,542 658,919 691,865 726,458

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Revenue 4,219 4,084 4,341 4,658 4,977

Direct cost 3,039 3,004 3,191 3,423 3,627

Gross Profit 1,180 1,139 1,282 1,424 1,560


Gain on disposals 26 15 19 19 19

Penalties and claims 16 17 18 20 21

Other 46 48 51 55 59

EBIT 646 497 596 685 768

EBITDA 818 664 764 856 941

Net Financing (43) (57) (50) (53) (57)

EBT 606 439 546 632 711

Tax 146 112 141 166 187

NCI 3 2 2 3 3

Net Profit 457 325 402 463 521

(IDR Bn) 2018 2019E 2020F 2021F 2022F

Net Income 457 325 402 463 521

Depreciation 172 167 168 171 173

Chg. in NWC 45 (7) (6) (7) (8)


Capital Expenditure 39 (30) (104) (153) (151)

Chg. in LT Assets (81) (21) (26) (20) (5)

Chg. in LT Liabilities (21) (20) 39 48 48



Chg. in ST Loans (58) (48) (11) 11 11

Chg. in LT Loans (73) (95) (23) 22 22

Dividends Paid (160) (114) (141) (162) (182)

Others 3 2 2 3 3


Beginning Cash 474 797 958 1,259 1,635

Change in Cash 323 161 301 375 432

Ending Cash 797 958 1,259 1,635 2,066

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SINARMAS SEKURITAS INVESTMENT RATINGS GUIDE BUY: Share price may rise by more than 15% over the next 12 months. ADD: Share price may range between 10% to 15% over the next 12 months. NEUTRAL: Share price may range between –10% to +10% over the next 12 months. REDUCE: Share price may range between –10% to –15% over the next 12 months. SELL: Share price may fall by more than 15% over the next 12 months. DISCLAIMER This report has been prepared by PT Sinarmas Sekuritas, an affiliate of Sinarmas Group. This material is: (i) created based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such; (ii) for your private information, and we are not soliciting any action based upon it; (iii) not to be construed as an offer to sell or a solicitation of an offer to buy any security. Opinions expressed are current opinions as of original publication date appearing on this material and the information, including the opinions contained herein, is subjected to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this publication may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, integrating and interpreting market information. Research will initiate, update and cease coverage solely at the discretion of Sinarmas Research department. If and as applicable, Sinarmas Sekuritas’ investment banking relationships, investment banking and non-investment banking compensation and securities ownership, if any, are specified in disclaimers and related disclosures in this report. In addition, other members of Sinarmas Group may from time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or other business from companies under our research coverage. Further, the Sinarmas Group, and/or its officers, directors and employees, including persons, without limitation, involved in the preparation or issuance of this material may, to the extent permitted by law and/or regulation, have long or short positions in, and buy or sell, the securities (including ownership by Sinarmas Group), or derivatives (including options) thereof, of companies under our coverage, or related securities or derivatives. In addition, the Sinarmas Group, including Sinarmas Sekuritas, may act as market maker and principal, willing to buy and sell certain of the securities of companies under our coverage. Further, the Sinarmas Group may buy and sell certain of the securities of companies under our coverage, as agent for its clients. Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Recipients should not regard this report as substitute for exercise of their own judgment. Past performance is not necessarily a guide to future performance. The value of any investments may go down as well as up and you may not get back the full amount invested. Sinarmas Sekuritas specifically prohibits the redistribution of this material in whole or in part without the written permission of Sinarmas Sekuritas and Sinarmas Sekuritas accepts no liability whatsoever for the actions of third parties in this respect. If publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Additional information is available upon request. Images may depict objects or elements which are protected by third party copyright, trademarks and other intellectual properties.

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