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Market Outlook - Top Picks for 2015
January 12, 2015 09:35

We are positive on JCI in 2015, with end year index target of 5,900. We believe that 2015 will be the year of transformation in Indonesia with the establishment of stronger foundations for structural change in the domestic economy going forward.

There are four main reasons to be bullish on Indonesia’s equity market: 1. From a macro perspective, we believe that Indonesia is still heading in the right direction. Notably, there is less prospect of higher interest rates as inflation will more quickly normalize with the recent fuel price cuts; 2. The reduction in fuel subsidies will provide the government with plenty of room to boost spending in more productive sectors; 3. Political risk is gradually abating, as evident in a more conducive working environment between the legislative and executive, and 4. Improving macro-economic conditions will positively affecting corporates performance.

Government decision to abolished subsidy on gasoline while introducing fixed subsidy on diesel and kerosene will ultimately speed up the transformation process. Even before the recent cut in fuel, the saving itself has already been large with fuel subsidy to go down to only IDR93.8t from the fuel subsidy allocation of IDR276t stated in the 2015 state budget. With the recent abolishment of subsidy in gasoline, potential saving is greater. In total the government will only spend slightly over IDR60t of fuel subsidy in 2015. As such, with saving more than IDR200t, there would be more allocation to infrastructure spending as well as food security program.

Higher government spending is key to stronger economic growth, in our view. On interest rate, with normalization of inflation later in 2H15, we believe that another increase in the BI rate will be unnecessary at this stage. We also expect the CAD issue is gradually resolving and eventually this will pave the way for IDR strengthening in 2015, albeit gradually, with volatility likely to be seen over the short term.

We still foresee, however, short term pressure on macro, especially with seasonally high monthly inflation in January. However, inflationary risks are only short term, in our view. Seasonally, monthly inflation will start to ease in the February to April period, before escalating mid-year. The key risk centers on government policy toward food commodity imports. More stringent restrictions on food commodity imports could lead to higher domestic food prices, pushing up inflation.

On micro level, corporate performance is still shaping up well. Cost pressure from high labor cost will be eased by the lower energy cost. We still expect for positive growth this year, although we estimate EPS growth to moderate to 12% in 2015 from 14% in 2014, mainly driven by normalization of commodity prices which affect the agriculture, metal mining and heavy equipment sectors. 

We maintain our positive view on the Indonesian equity market for 2015. In our view, the government’s commitment to upgrading Indonesia’s dilapidated infrastructure is a key driver that will, in turn, lead to improvements at the micro level. We see 13% upside in 2015 with a year-end index target of 5,900 based on a top down approach with a PE benchmark of 16.2x which reflects half a standard deviation above the mean. Our bottom up approach also shows similar index level.

Our top picks for 2015 are BMRI, BBRI, TLKM, SMGR, PTPP, WSKT, ACES, ICBP, INCO and BSDE.