Erwan Teguh +62(21) 3006 1720 - erwan.teguh@cimb.com
• Surviving the crisis. A conservative budget (suggesting limited countercyclical
spending ability as well), the active seeking of bilateral loans and cross-currency
swap facilities should buffer macro risks, in our view. On the corporate front, low
leverage, robust cash generation, and manageable debt maturing over the next 12
months suggest low insolvency concerns.
• But painful two quarters, at least. We expect GDP growth of 3.5% for 2009, down
from some 6% this year, the lowest in eight years. The Indonesian currency would
likely remain weak, before recovering towards end-2009. Consequently, market
EPS could contract by 6%, the first time in eight years, under our forecasts. After a
relatively unscathed 9M08, demand has collapsed. Coupled with a 20%-plus
currency depreciation, earnings would come pressure in 4Q08 and 1Q09. The
pressure should subside in 2Q09 on expected cost falls. In our base case, earnings
will recover only in 3Q09 on the back of: 1) improving macros; and 2) likely higher
corporate spending post-elections.
• Election base case: a boost. Parliamentary elections would be held in Apr 09, with
presidential elections in Jul 09, likely a second round in Sep 09. Our base case is,
the elections would be closely contested but peaceful, as in 2004. The incumbent is
most likely to secure a second and final term, based on surveys. A post-elections
market rally could potentially take place in mid-3Q09.
• Key catalyst: private & state spending; key risk: currency. Private consumption
resilience, aided by fuel price cuts, and if the government spends early in 1H09,
might buffer a slowdown, providing key catalysts. The key risk would be currency.
Another bout of severe weakness would drag fragile confidence down further, and
might spill over to socio-political stability, given elections. Our base case assumes
the rupiah at Rp11.50-12k/US$ in 1H09, strengthening gradually thereafter.
• Two-part domestic theme for 2009. Focus on elections through the most of 1H09,
with consumption as the key catalyst. Staying defensive over this period, with an
emphasis on earnings and balance-sheet resilience, is our recommendation. If
elections sail through and macros start to improve (key indicator is government
bond yields inching closer to 12% and sustainable), more aggressive portfolio
positioning is warranted, in our view, by shifting to cyclical and growth sectors,
including adding commodities to the mix.
• Index target at 1,530; Neutral for now. Our index target is derived bottom-up,
implying 8.4x CY10 earnings, also in line with a P/E target of 8.5x using 2-step
DDM. Six defensive picks are: TLKM, BBCA, PGAS, UNTR, RALS and KLBF.
Recovery picks are BMRI, PGAS, UNTR, PTBA, INTP and AALI. We would add
ASII to our portfolio when GDP growth improves for two consecutive quarters,
probably in early 2010, as is consistent with past patterns.