The good, the bad & the ugly: 3Q14 corporate result round-up

Harry Su
Senior Associate Director
Head of Research

Thus far, 82 (71 percent of the total market capitalization of the IDX) out of 93 stocks under our coverage have announced 3Q14 results. Exhibit 5 shows the list of 11 stocks that have not reported, of which 9 companies are in the midst of undergoing limited review and have until the end of November 2014 to report.

In aggregate thus far, operating profit growth for our basket of stocks, excluding the metal sector, has reached just 1.7 percent y-y (exhibit 1), a deceleration when compared to the 3.7 percent y-y growth reported in 3Q13, and our projection of 9.2 percent y-y growth in our result preview.

However, on the bottom line, 3Q14 net profit growth of 8.0 percent y-y has been relatively in line with our forecast of 9.1 percent y-y, mainly helped by the performances of plantations, property and oil-related sectors.

The five sectors listed in this “good” category (exhibit 2), which have booked above-market growth rates at both the operating and net profit levels, were not surprising to us. On the metals and plantations front, our covered stocks have benefited from strong pricing and the IDR depreciation. In property, most counters benefited from solid marketing sales in the past couple of years while PWON surprised us with a one-off below-the-line gain, causing its bottom line to exceed our forecasts by 34 percent. From an organic standpoint, SMRA recorded remarkable q-q revenue growth of 61 percent, helped by the completion of a township in Gading Serpong.  

On the consumer sector, we see a decoupling between the performances of discretionary and staples with the latter booking earnings which were largely in line with our estimates (exhibit 9).  On the flip side, the consumer discretionary sector (i.e. media, retail and confectionary) mostly disappointed – note that while the 3Q14 results of SCMA and MNCN were in line with our estimates, consensus’ expectations were much higher than ours – investors should expect downgrades to come from the street.

In the “bad” sector, there were three industries with mixed performance in terms of operating and net-profit results (exhibit 3) relative to the market. In the coal sector, low coal prices caused operating profit contraction on a y-y basis while 3Q13 low base effect and some below the line support (e.g. higher interest income due to lower capex) allowed for bottom lines to grow for PTBA and UNTR.  

On infrastructure-related stocks, construction growth was mainly dragged down by ADHI's poor performance, although other players such as PTPP (the highest growth), WSKT and WIKA were relatively in line with our expectations. On banks, the industry in general faced margin pressures due to a combination of higher funding costs and worsening assets quality while non-interest incomes remained low at less than 30 percent of operating income on slower loan growth at 11.9 percent y-y in 3Q14.    

In the “ugly” category (exhibit 4), the poultry sector was the worst performer given DOC oversupply and pressured ASP, which led to higher sales discounts causing depressed margins.  On cement, the sector suffered from not only election disruptions but also late price hikes, creating margin pressure for the players.  

In the telecommunication sector, weakness was caused by strong TLKM performance in 3Q13 resulting in a high-base effect and some consolidation on the back of EXCL’s merger. Finally, for automotive, the sector was hurt by margin compression and lower sales volumes on continued intense competition.        

In sum, however, we think that while 3Q14 earnings have generally been lower than expected , the market’s 3Q14 net profit growth has remained quite robust at 8.0 percent y-y (exhibit 1), displaying improvement when compared to 2Q13 overall performance.  
Nevertheless, since the 3Q14 result releases, our analysts have thus far made earnings changes on 16 stocks, of which mostly are downgrades with the exception of six stocks: UNTR, BDMN, PTBA, PWON, SGRO and SMBR.  Within the retail sector, we will also be reviewing our earnings model for MAPI and RALS following disappointing performances.
Going forward, we advise investors to be cautious on Poultry given the government’s planned fuel price hike, which is likely to result in negative sentiment on the sector ahead on less chicken consumption as consumers’ purchasing power is eroded.  Additionally, we maintain our negative stance on the Automotive and Coal sectors, with the latter likely to see weak performance as pricing for 2015 contracts are normally conducted in 4Q14, amid the current weak coal price environment.  
Finally, our warning that the consumer discretionary sector would perform poorly has begun to materialize in this 3Q14 earnings season – even before the fuel price hike.  We think there will be increased disappointments ahead from the street as analysts downgrade earnings.  On a more positive note, we are encouraged that consumer staples have remained resilient and should be able to provide shelter for investors.