Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Country Assessment
Regional Equity Strategy Q4 2007
Sector recommendation and stocks for Indonesia
SECTOR REMARKS STOCK SELECTION
Automotive
Overweight
(Upgrade from Neutral)
Property
Neutral
Cement and Construction
Overweight
(Upgrade from Neutral)
Consumer
Overweight
Banking
Overweight
(Upgrade from Neutral)
Plantation
Overweight
We upgraded the Automotive sector to Overweight following evidence of a
recovery in demand, with 8M07 car and motorcycle sales growing 38.9% and
11.0% y-o-y, respectively. Low interest rates and recovering consumer demand
are drivers of improving auto sales. However, competition in the automotive
market is rising and will pressure margins and Astra International’s market share.
But on a net basis, Astra should benefit the most from recovery in national auto
sales.
The Property sector is another beneficiary of low interest rates and recovering
domestic demand. But we remain Neutral on the sector this quarter because the
valuation discounts to RNAVs have been narrowing. In addition, our property
universe consists of small cap stocks that underperformed during periods of
strong volatility and/or market downturns.
The sector is set to benefit from recovering domestic demand and resumption of
infrastructure development in the country. Supported by a falling interest rate
environment and Government’s efforts to encourage investments in
infrastructure, we are positive on prospects for the sector.
For cement producers, we favor SMGR for its diversified market share, less
reliance on diesel fuel (no longer subsidized since 4Q05) compared to its peers,
strong balance sheet and more importantly, undemanding PER valuation.
For construction, our top pick is ADHI, the largest construction company in the
country with a balanced exposure to Government and private projects, and for
which valuation is undemanding.
We remain Overweight on the Consumer sector supported by evidence of
recovering consumer spending. Low interest rates and the 9.5% wage
adjustment this year are strong supporters of consumer spending recovery. In
general, companies in the Consumer sector also focus on domestic rather than
export markets. However, we remain cautious of the impact of rising prices of
wheat, CPO and other commodities on flour and food producers such as INDF
and MYOR. We like KLBF, which was also our top big cap stock pick for 3Q07.
We remain Overweight on the sector following strong loan growth in Jul 2007,
at 20.7% y-o-y. Meanwhile, widening credit spread and volatility in the global
fixed income market, should create room for the Banking sector to tap on
corporates that had to postpone or cancel global bond issues. Furthermore, the
pause in the BI rate cut should make some banks reconsider offering low
mortgage rates so they would not have shift huge SBI portfolio into mortgage
loans. This means the price war in the mortgage segment will subside. We like
Bank Rakyat Indonesia for its strong competitive advantages and its growth
opportunities in the consumer and corporate segments. The stock is also valued
at below its sustainable ROE.
We believe current high CPO prices are sustainable because it supported by
structural changes in demand coupled with a tight supply situation, rather than
speculation. Hence, CPO prices should remain strong in the next two years.
There could be another rally early next year, when production is seasonally low.
Our top picks are Astra Agro Lestari (AALI) the largest plantation company in
Indonesia which has the lowest cost, and we are impressed with UNSP’s growth
strategy.
ASII
-
ADHI, SMGR
KLBF, RALS
BBRI
AALI, UNSP
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