Good Morning. We have been bullish on the Indonesian consumer sector. Despite its massive out-performance in the last 12 months, there are still lots of reasons to remain long term bullish. Indonesian consumer stocks under our coverage registered 38% profit CAGR in the last five years matching Chindia, but still are trading at 25-30% discount to Chindia peers.
Sector should exhibit J-curve growth over the next decade, driven by hockey stick growth in middle class, increasing urbanization and falling unemployment. A few simple charts tells the story;
Middle Class: The number of middle class is expected to grow by 50% in 2012, with more than 60% of the population urbanized
Young population: Indonesia has a young population with 44% people below 24 years old. Median age is 28 years. Only India is younger
Urbanization: 62% urbanized within next five years, meaning 3.4mn people move into cities each year
Property related credit has grown by a Cagr of31% over the past seven years. Nonetheless, mortgage to GDP is only a mere 2.2%.
Swati, with the help of her diligent research associate Jessica, have put in together Indonesia consumer report. Three small cap top picks in the consumer sector are: home improvement retail chain Ace Hardware (ACES IJ), high end retailer Mitra Adiperkasa (MAPI IJ), and candies/cookies maker Mayora (MYOR IJ).
Three small cap top picks in the consumer sector are:
Home improvement retail chain Ace Hardware (ACES IJ), mid-high end retailer Mitra Adiperkasa (MAPI IJ), and candies/cookies maker Mayora (MYOR IJ).
Ace Hardware (ACES IJ): Home depot of Indonesia
This is CLSA Jakarta staffs’ favorite shop. One stop shop for household needs. Service level is in general very satisfactory. ACES’s staffs have good product knowledge and very helpful. Chances are good that you always come across something to buy when visiting their stores.
- ACES should continue to re-rate to Chindia peers, which are trading at 20x 11CL earnings.
- ACES is now trading at 15.3x 11CL PE.
- ACES imported 80% of its products, and currency appreciation should boost margins, meaning there is upside to our forecasts.
- 5% Rupiah appreciation impacts earnings positively by 16.2% assuming that the costs cuts are not passed.
- We remain a buyer of the company with 16% upside.
Mitra Adiperkasa (MAPI IJ): Franchise King
Has 4 very attractive F & B franchises (Starbucks, Dominos, Burger King etc) growing rapidly with massive operating leverage. At only US$400m mkt cap, arguably you are getting its huge retail franchise for free. They have brands like Sogo, Debenhams, Seibu, Zara, Reebok, Lacoste etc etc
- MAPI is set to post record earnings in 2010 after years of lackluster performances.
- The company is now focusing on rolling out existing brands rather than acquiring new ones, so margins should improve as pre-operating expenses drop.
- Our back of the envelope calculation suggest that MAPI is only trading on 9.6x PE versus retailers peers at 22x. We believe consensus is way too conservative on their foreacast.
Mayora (MYOR IJ): Biscuit Dominator
“Another Mayora product” is their hugely popular tag line. Easy to remember. We have plenty of their products in our pantry (candy and biscuits mostly). Management has over 30 year’s track record in the business and the company is the major beneficiary of the growth in domestic consumption.
- Despite short term margin pressure, Mayora is expanding fast exceeding our expectations.
- Reliable management paired with a large consumer base in Indonesia, Mayora still has much room to grow.
- The second generation has successfully brough in a fresh lease of life in the business, growing profits at 34% CAGR in 2004-2009.
- At some stage, we expect the unlisted distributor to be consolidated.
- We remain a buyer of the stock on weakness with the target price and forecasts under valuation.
News Headlines/Others:
Borneo Lumbung USD 2.1bn. Borneo Lumbung’s shares are valued at USD 1.5-2.1bn following the IPO at end of October or early November. Borneo plans to release 3.32 mn shares or 20% IPO with target funding of USD 400mn. Borneo has 90% market shares as a hard coking coal producer. Comment: This is going to be the first listing of coking producer in Indonesia. The company too is the first producer of medium volatile hard coking coal in Indonesia. It is already producing 1-2m tpa and likely to ramp up to 5 m tpa in 2012. At Us$1.5-2.1bn, valuation implies 9.2-13x FY11 P/E (vs 10-12x for the other thermal coal peers).
Gov plans to hike cigarette tax excise by 5% in 2011. The government plans to increase the tax excise for cigarettes by 5% in a bid to ramp up tax revenue next year. The tax hike will apply to all types of cigarettes sold in the country. Comment: We have factored in 7% increase in excise taxes. This could mean 6% increase in our 2011CL earnings.
Noble eyes to buy 20% of Berau's (BRAU IJ) stake? Local media reported that Noble Group, Hong Kong-based commodities firm, is considering to buy up to 20% shares at Berau in a bid to secure their coal supplies. China Investment Corportation owns 15% at Noble. A local newspaper also reported that Glencore is also eying to acquire Berau. Comment: This has been a lingering market rumour for some time already. The newspaper also reports acquisition price at Rp520/share (8% premium to current price), which therefore implies a total of US$400m acquisition. No official comment from Noble yet, while some Berau officials claimed that Noble is one of few interested investors to buy Berau because Noble wants long-term coal supply. If proven accurate, could give a boost of confidence in Berau, in our view.
Agung Podomoro Group aims to raise Rp3tn from IPO in Nov. The company aims to raise Rp3tn through initial public offering on 9 November 2010. Agung Podomoro will float around 6.15bn shares or 30% of the company’s capital. The price range is estimated to be between Rp406 to Rp487/sh. The company’s revenue 1H10 grew 274% YoY. Net profit jumped from Rp15.5bn to Rp156bn in the same period. The company is holding a public expose today. Offering period for the listing is 1-3 Nov. Comment: Podomoro will utilize 30% of the proceeds for development and acquisition (i.e 40% of it for development of “Green Lake Sunter” in North Jakarta of 4ha, and 60% for new project development). Another 35% of the proceeds will be used to complete the Central Park project in West Jakarta, and the remaining 35% for debt repayment. Podomoro was established in 1969, and had become famous with their flagship township Sunter in North Jakarta, a 500ha area developed in 70-80s. They are now well-known for their apartment complexes, residential areas and mixed-use commercial projects.
Jakarta’s minimum wage up 10%. DKI Jakarta’s province government will formally announce 10% increase in 30 October 2010. Jakarta’s minimum wage in 2010 is IDR 1,118,009/month.
Attorney General loses power to ban books. In a landmark verdict, the Constitunional Court struck out a new law that gave the Attorney General's Office the power to ban books, saying that such power should rest with a judicial court. Confiscating or banning publications and books should be done through the process of law.
Muslim hard-liner in Central Java. Muslim hard-liners are reportedly targeting one of its most beloved icons, wayang. The hard-liners have broken up several performances in the area. One of the attack in Sukoharjo during a wayang performance dispersed the members and audience.
Bakrie Telecom (BTEL IJ) and Telkom (TLKM IJ) planning US$1bn deal for CDMA. BTEL is set to acquire the CDMA unit of TLKM in a share swap deal worth US$1bn. BTEL was to issue new shares and swap them for TLKM's CDMA assets, which are worth up to Rp9tn.
Key Indicators:
JCI: 3611.979 +64.731, +1.82% (record!), T/O 748.3m USD, YTD: +51.51% (in US$)
Back in bull-market mode. Or maybe that mode has not been switched off at all in the last couple of weeks, despite a 3 day consolidation. Yesterday's bounce to push the index to a new record only shows a lot of investors, both local and foreign, are waiting with buy-orders anytime the market shows a bit of a pull-back.
Book is flat as of this morning.
Chart of the Day:
Unemployment Rate - Indonesia
Did You Know?
That only 1 in 100 people in Indonesia has a mortgage and only 1 in 100 has a credit card? Access to cheaper and easier credit will drive consumption boom. As people have more money in hands after providing for basic needs, the first things they do is improve access to transportation and buy homes. Record high car and motorcycle sales this year indicates that people are moving beyond their basic needs.
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