2014 in review - 2015 market outlook

Harry Su
Senior Associate Director
Head of Research

2014 ended strong for the JCI, which closed at 5,227 (high: 5,263 on 8 September; low: 4,161 on 6 January), reflecting a strong annual performance of 22.3% y-y, much better than the 2013 performance of -1% y-y.  In terms of regional performance, the Jakarta Composite Index was the fourth best in both absolute (exhibit 1) and USD terms (the IDR depreciated 1.8% in 2014), behind Shenzhen/Shanghai (China), Sensex (India) and PCOMP (the Philippines).

In terms of average daily turnover, 2014’s level of IDR4.7tn (USD396mn) was down compared to 2013’s average daily transaction of DR4.9tn (USD469mn), down 4% y-y in IDR basis and 16% in USD terms, partly also dragged down by changes in trading units and alterations in price fractions.

Exhibit 2 shows the 10 best 2014 performing stocks within our coverage, led by construction plays WSKT, PTPP, WIKA, ADHI and TOTL, helped by the Jokowi euphoria on expected strong government expenditure on infrastructure. This is followed by property-related counters LPCK, SMRA and PWON. On the flip side, the 10 worst performing stocks in our covered universe were dominated by coal plays BUMI, ITMG and HRUM as well as consumer discretionary (RANC and RALS) and poultry (MAIN and JPFA) counters.

On the IPO front, despite last year’s limited number of new listings (2014: 23; 2013: 30), raising IDR9tn (USD720m), the performances (exhibit 3) were strong, providing some 75% average return (2013:2%). However, stripping out the top six best-performing IPOs (ASMI, BALI, WTON, LINK, BPII, TARA), which provided triple-digit returns, the average IPO performance would come down to 19.5%, more in line with the overall JCI performance.  

Average fundraising was also lower at IDR391bn (USD31m), compared to 2013’s IDR557bn/ USD53m, translating to an average market cap of USD104m (assuming 30% average free float), suggesting relatively small IPOs. Note that on 17 January 2014, there was one re-listing: Tunas Alfin (TALF) which we have not included in our IPO list.  In January 2015, there is only one company (Bank Yudha) planning to list in January, although we note that several state-owned companies are planning corporate actions in the form of IPOs and rights issues throughout 2015.

Helped by lower global oil prices, we applaud Jokowi’s 2014 year-end closer move in partly dismantling Indonesia’s inefficient energy subsidy system by lowering the gasoline price from IDR8,500 liter to IDR7,600 (down 10.6%), with diesel prices cut 3.3% from IDR7,500 per liter to IDR7,250 while kerosene prices remained unchanged at IDR2,500 per liter. Once approved by the parliament, this unprecedented government decision will positively impact the market as follows, in our view:
1.    The fixed-subsidy system (diesel subsidy of IDR1,000 a liter) provides a bridge for the government’s next step of completely doing away with fuel subsidies.  At this stage, the gasoline subsidy is scrapped although the government will continue to pay for gasoline-distribution costs for areas outside of Java, Madura and Bali.  
2.    Lower fuel subsidy to around IDR17tn, accounting for just 1% of total government expenditure from IDR276tn or 13.5%, translates to our estimated infrastructure increased spending of IDR317tn, up 98% from IDR160tn in 2014.  
3.    A drop in inflation to reach the 5.04% level (2014: 8.36% y-y) from 5.6% previously, helped also by lower commodity prices on depressed oil prices.  This should pave the way for lower interest rates in 2H15 once the Fed rate hike overhang is out of the way.
4.    Decreased CAD to 2.0% in 2015, down from an estimated 2014 level of 3%, should eventually allow the local currency to appreciate to the IDR11,500/1USD level based on our forecast.  
5.    More manageable CAD could lead to an investment upgrade from S&P, which would result in lower borrowing costs to help accelerate the much-needed infrastructure-related projects.  

Thus, going into 2015, we have a 5,900 target for the JCI, in line with our 2015F market EPS growth of 12% y-y.