Target index upgrade ke 3000
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Research Today (attached): The Road to 3,000
Nick Cashmore reiterate our belief that JCI index target of 3,000 is
achievable.
To put things into perspective, back in 2000, Indonesia 's GDP was a little
more than 50% the size of Taiwan 's GDP. Today's Indonesia 's economy is 15%
larger.. This is largely thanks to commodity cycle.
Several key factors:
Soft commodities will continue as a key driver to the economy. In his recent
CLSA U report Monster in the corn patch Hugh Peyman noted that CRB Index is
still 46% below its 62-year average. His conclusion: "We expect soft
commodities in general and food in particular to lead the second half of this
decade long commodity rally"
Significant domestic liquidity that can be mobilized. Total equity assets under
management by the local mutual fund industry have jumped 130% this year but are
still only US$2bn in aggregate (vs. US$124bn in total rupiah deposit in the
banking system).
Valuations: not demanding relative to peer BRIC markets.
Some stock ideas: Telkom (TLKM IJ), Mandiri (BMRI IJ), Bank Rakyat (BBRI IJ).
Sumalindo (SULI IJ), by Eugene Chung
Got to take a look at Sumlindo. This has been my high conviction idea and the
stock got re-rated from under Tp1,000 in June 06 and peaked at Tp4,800 in July
this year. However, with the ongoing US housing market slowdown and the
Japanese (biggest user of tropical plywood, over 30% of world's consumption)
economy turning negative again, plywood prices have started to soften. On this
backdrop, timber operators in the region suffered (like SULI, TA ANN, WTK,
Lingui) and stock prices got hammered. (see chart) In a sector sell off, most
investors generally do differentiate between names. Just sell timber (a massive
buying opportunity for the good names)!!!! Sure lower prices usually translate
to lower margins but I would like to point out for Sumalindo impact to bottom
will not be nearly as bad compare to the Malaysia counterparts and overtime
earnings will be less cyclical. Why?
1, SULI is a cost efficient operator. Major cost cutting initiatives were
implemented last year and more going forward. 2Q07 results start to show good
results. 2nd coal fired power plant will be on line in 08 and new peeling
machine will improve large diameter log recover from 45% to 55% next year.
US$8-10m dollar savings there.
2, Indonesia is the only top three (includes Malaysia Brazil) tropical
producers that actually have sizeable land left. We believe SULI is close to
securing additional concession that would increase their area by 50%+. Getting
supply of logs is key = higher volume.
3, SULI is the only listed operator that has large proportion of their assets
that has eco friendly credentials "FSC certification" Buyers esp in Europe and
US pay a big premium to FSC certified wood products.
4, SULI focus on high value products (vs commodity based products) which
commands a premium. Plywood has actually gone up a bit after bottoming a few
months ago at around $520/m3 (Malaysian is now well under $500/m3) The current
prices for Sumalindo are Plywood $545/m3
Sec Ply $754/m3 .MDF $270/m3. (Plywood prices is now slightly below our
forecast but MDF is well above)
Last week, the stock got hit hard on news that SULI hasn't received permits to
cut some of its forest (part of their plans to convert some of their natural
forest to plantations), meaning it will have to buy more from the outside,
thereby increasing costs. Internal supply of logs for plywood production will
be around 140,000 m3, they had to buy 20,000 m3 from outside in 1Q07 and will
need to buy an additional 50,000m3 from outside to meet volume targets this
year. The main impact will be on costs as buying from outside obviously costs
more, though it has come down a lot. Buying outside costs $130/m3 vs internal
production of around $100/m3. We est max EPS impact for 2007 is 15-20% for
2007 (benefit will likely pass to 2008, net net is zero impact). I think the
price decline is overdone and that there are two big catalysts on the way: the
acquisition of around 250,000m3 of natural forest, increasing total forest area
by 40%. BUY! Tp 5,200.
Comment from James Gruber
"We remain positive that plywood will head back towards $600/m3 over the next
6-12 months. Why? Because supply remains constrained due to limited supply from
Indonesia from the crackdown on illegal logging. Also, Malaysia is having to
search outside to find wood as there is so little left in that country. Even
China is struggling with a shortage of wood to supply its own needs and is
looking elsewhere to find it.
The demand side is harder to predict. The gloomy scenario is what Dr Jim and
our economics team are suggesting, which is a US recession and global economic
slowdown. What I suggest is that even if this happens, plywood prices should
hold up reasonably well as supply is constrained and Japan , the largest
consumer by far, has limited downside from here, economically speaking.
On the MDF side, it is a bit more opaque and difficult to gauge. China is the
largest producer and consumer of MDF and it also has few statistics/information
to use/forecast. Very simply, we have seen a big build out of supply over the
past few years in MDF capacity and up to now, demand has outpaced this. I don't
know how long this will last. While China grows rapidly, so the MDF price
should remain strong…
Operationally, Sumalindo looks fine. The big kicker over the next 6 months will
be acquisitions. Along obviously with prices, this is the key going forward. It
has been saying for a long while that total forest area will increase by 20% in
07, and I hope that is still the case. I think there is significant scope for
Sumalindo to acquire forest at a decent price in Indonesia . This is essential
to becoming totally self sufficient and being able to grow volumes over time."
News Headlines:
Progress in coal-fired power plant 10k MW projects. This week, state-owned
power company PLN has signed contracts for 5 transmission lines to support the
power generated by the 10k MW power plants. Another 10 projects will be signed
in October with plans to accomplish the appointment of contractors for the US$2
billion transmission projects by February 2008.
Golkar in no hurry to nominate its candidate for 2009 election. VP Jusuf Kalla
political party Golkar (currently biggest Indo political party in the House of
Representatives) has said that they are in no hurry to nominate its candidates
for the 2009 presidential election. VP Kalla said recently Golkar would
announce its presidential and vice presidential candidates six months before
the presidential race. Golkar wants to focus on improving the government's
performance until 2009. Recently, the second biggest Indo party PDIP has named
ex president Megawati as its candidate to contend President SBY in 2009 and
the Moslem party PPP has moved closer to PDI-P, seeking a possible coalition to
contend the election. Outgoing Jakarta governor Sutiyoso has also shown his
interest in running for presidency.
Bank Niaga (BNGA IJ) claimed that it has not done internal merger preparation
with Lippobank (LPBN IJ). BNGA said that it is up to their shareholders to
decide. Bank owners in Indonesia are required to submit their proposals to
respond to single presence policy by Dec 2007 at the latest.
Barito Pacific's (BRPT IJ) debt restructuring process with Bank Mandiri (BMRI
IJ) is almost completed. Total amount of debt to be restructured is around
Rp180bn (US$19.7mn). The debt restructuring is likely to be completed ahead of
BRPT's massive rights issue plan.
Nusantara Infrastructure ( META IJ) is currently exploring bank loan
syndication to finance the purchase of a cement company (Rp700bn or US$77mn).
Total funds required to purchase the cement company is Rp1.8tn (US$198mn).
Likely to be a cement company related to the group: Semen Bosowa in Sulawesi .
Electronic retailer Agis (TMPI IJ) rights issue is probably canceled due to
investigation (stock trading manipulation) that is currently going on.
New tender offer rules will be issued soon. Two important changes: (1) the
ownership trigger level will be amended from 25% to 30-35% (2) the minimum
price will be changed from the highest price in the last 90 days to the highest
of the average 90 day price.
Economic releases this week:
Inflation and trade numbers will be released today.
Inflation (1 Oct 07, 2pm Jakarta time):
Sept YoY: previous month 6.51%, consensus 6.74%
Sept MoM: previous month 0.75%, consensus 0.62%
Sept core inflation YoY: previous month 5.66%, consensus 5.82%
Pre Hari Raya spending might push the prices (especially food) upwards. On a
positive note, stronger Rupiah lately should ease the inflationary pressures.
Trade data (1 Oct 07, 2pm Jakarta time):
Aug exports YoY: previous month +10.5%, consensus +10.7%
Aug imports YoY: previous month +15.4%, consensus +14.1%
Aug trade balance: previous month US$3.552bn, consensus US$3.449bn
Bank Indonesia will convene next week, 8 Oct 07 to make decision on interest
rates.
Other economic releases:
Net foreign reserve (Sept 07)
Key Indicators:
JCI: 2,350.20, last week: +1.02%, YTD: 29.19% in US$ term
ADR:
TLKM US$48.82 = IDR11,113
ISAT US$42.47 = IDR7,734
The market is likely going to see a new record high sometime this week.
Sentiment remains pretty upbeat, and volumes are still supported by active
local investors. Foreigners, although sidelined, have been consistent
net-buyers as well, but it is the local fundflow that has proven to be the real
strength these days.
Ahead of the inflation and trade data today, the rupiah continues to
strengthen, in line with the rest of the region. Currency already below the
9100 levels, up 50bp this morning.
Indosat (ISAT IJ) one of the outperformers last week. stock has underperformed
big brother Telkom (TLKM IJ) aggressively, and remains a potential M&A target.
Best regards,
Wuddy Warsono, CFA
CLSA Indonesia | Institutional Sales
Phone: (62-21) 573 9460
HP: (62) 816 78 6352
Fax: (62-21) 574 6923
[EMAIL PROTECTED]
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