Brief Indonesia: Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town and more

In this briefing:

1. Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town
2. Monthly Geopolitical Comment: Waiting for Trump and Xi to Clinch a Deal
3. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town
4. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?
5. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

1. Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town

A visit in Jakarta to the Blue Bird (BIRD IJ) office was well-timed as the company is close to the conclusion of two corporate actions, as well as an interesting extension to its relationship with Go-Jek Indonesia (1379371D IJ).

Both acquisitions are synergistic with its existing business and represent long-term opportunities rather than an immediate significant boost to earnings.

The company’s underlying fundamentals continue to improve with fleet utilisation up versus last year in 4Q18, as was the average revenue per taxi.

The company continues to see the benefits of its tie-up with Go-Jek, which will soon morph into something even more significant.

Blue Bird (BIRD IJ) remains an interesting way to play the rising levels of affluence amongst the rising middle classes in Indonesia. the company is close to completing two corporate actions including a new venture into the car auction business with Mitsubishi UFJ and the acquisition of an intercity bus company. It is also close to signing an extension and expansion of its relationship with Go-Jek, which will help to cement its position in the online ride-hailing space. Underlying fundamentals continue to improve both in terms of fleet utilisation and average revenue per taxi. According to Capital IQ consensus, the company trades on  14.9x FY19E PER and 13.7x FY20E PER, with forecast EPS growth of +16.2% and +8.9% for FY19E and FY20E respectively. The near-term completion of two corporate actions and an extension of its agreement with Go-Jek Indonesia (1379371D IJ) should provide positive catalysts for the share price coupled with improving ridership, average revenue per taxi, and fleet utilisation.

2. Monthly Geopolitical Comment: Waiting for Trump and Xi to Clinch a Deal

3. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%. 

4. Global EM Special: Andean Condors Vs Asian Elephants – Where Is the Growth in EM?

Global growth is expected to slow over the coming quarters, possibly years – and emerging market economies are certainly not immune from this. Nevertheless, within this diverse universe, the pace of deceleration will be uneven. Whilst some “open” EM economies are generally synchronized with growth dynamics in the rest of the world, others will be shielded by a combination of idiosyncratic forces – including renewed accommodative (monetary and fiscal) policies, cyclical recovery or upswing in domestic growth drivers and – for some – positive political developments and reform progress. Still, other EMs are less fortunate and a growth deceleration is likely to deepen in the near-term – held back by less policy flexibility, political uncertainty and various domestic or external shocks.

With 4Q18 GDP growth reports underway, we sifted through – and synthesized – various growth indicators to introduce a “Growth-Profile Framework” (GPF) to systematically evaluate – and rank – growth profiles in a data-driven, automated and standardized manner. The “GPF” not only takes into account GDP for the most recently-reported four quarters but also forward-looking forecasts and the latest economist revisions, which often take into account the latest data surprises and other material developments.

The observation universe is the “Emerging Markets-25” (EM-25) of large, investable EM countries most often found in benchmark indices such as MSCI EM and JPMorgan (GBI-EM and EMBI) indices. This opportunity set offers a breadth of diversity spanning across Asia, EMEA and LatAm and different stages of development. 

Highlights: 

• Introducing the “EM-25” Growth Profile Framework: This data-driven, automated and standardized model generates a ranking of the “EM-25” economies based on a composite of factors reflecting: 1/ The most recent GDP growth data (in relation to three look-back periods), 2/ Forward-looking consensus growth forecasts (in relation to the most recent four quarters of GDP) and 3/ Upgrades and downgrades to those forecasts.
• Andean condors soar while Asian elephants amble along: LatAm – specifically the Andean economies (plus Brazil) – currently stand out as having the most attractive growth profiles among the EM-25. They are helped by a combination of – largely idiosyncratic – factors ranging from newfound reform optimism (Brazil), improving domestic confidence (Colombia), pent-up domestic demand (Peru) and stabilizing appetite for key commodities (Chile). This contrasts with export-oriented Asian manufacturers that dominate the bottom rankings. Elsewhere, the legacy of past macroeconomic policy choices – both painfully orthodox (Argentina) and otherwise (Turkey, Venezuela, Pakistan) – are taking their unique toll on certain other economies.
• Does growth matter for investment strategy? Yes…: Simplistically speaking, economies with exemplary growth profiles are viable candidates for long or overweight positions in equity markets and external debt. Strong growth is often associated with stronger corporate earnings potential as well as lower debt-to-GDP levels, respectively. Growth implications for FX and local debt are more ambiguous, but to the extent that a robust growth outlook guides central banks to tighten policy or lifts the government’s fiscal revenues over time, then this may also be positive for currencies and rates, respectively.

• …But it’s complicated: However, strong growth can detract asset performance if it is the result of unsustainable policies (e.g. overly loose fiscal or monetary actions) or if it leads to overheating conditions (e.g. runaway inflation or a wider current account deficit). An attractive growth profile, as with all data sets, needs to be judged against its context. Although high and improving growth is an end-goal for many policymakers, the road to strong – and sustainable – growth is far more important for its longevity (and for risk assets over the medium-term). For instance: Are growth prospects improving due to rising productivity (as it might from structural reform)? Or rather from overly-stimulative policies that risk fanning inflation or widening the current account deficit? To what extent do officials have the policy flexibility to stoke growth, smoothen downside growth risks or stave off a recession? We touch upon these questions in the individual country sections below.

• While the narrative is almost always more important than the number itself, this GPF framework nevertheless offers a valuable screening tool that systematically evaluates growth profiles – on a stand-alone and relative basis – across the “EM-25” universe.

5. Widodo’s Generals Take Fire / Anti-Foreign Rhetoric Takes Toll / Land Hampers Adhi’s LRT / MRT Near

Sparring remains lively in the presidential campaign, with the Prabowo camp targeting a liability for Widodo: retired generals in the cabinet.  But Prabowo is still campaigning ineffectively and defections of allied governors shows that some in his camp consider his prospects dim.  Police controversially dropped charges against a chief hard-line Islamic figure.  Anti-foreign rhetoric, chiefly from Prabowo, threatens to tug policy discourse towards his vision of barriers, autarky and state control.  Two forthcoming regulations on the property sector aim to safeguard consumers.  A review of geothermal policies is possible.  Upstream energy investment may be improving.  The IA-Cepa may conclude on 4 March.  Adhi Karya’s Jabodebek LRT faces a thorny land problem in Bekasi, where the China-backed fast train project may have complicated matters by overpaying. 

Politics: Campaign sparring continues apace, as Gerindra Chair Prabowo Subianto criticized infrastructure projects (they enable imports to penetrate further) and reiterated that “Rp11,000 trillion in Indonesian assets reside abroad”.  Campaign officials for President Joko Widodo lambasted the remarks and recalled that both Prabowo and his running mate appeared in the ‘Panama Papers’.  Meanwhile, retired generals from the rival campaigns exchanged jabs about events of May 1998; for Prabowo, the topic contains pitfalls (Page 2).  In a rare example of violence in election campaigning, a fracas outside a rally in Yogyakarta caused three minor injuries among rival youth groups (p. 4).  Elite endorsements matter little, but Widodo has garnered overwhelming support from regional heads (p. 4).  Police controversially dropped charges on hard‑line Islamic leader Slamet Ma’arif (p. 5).  Agus Harimurti Yudhoyono (AHY) takes over Partai Demokrat’s campaigning as Susilo Bambang Yudhoyono attends to his ill spouse (p. 6). 

Surveys: A newly released poll from the Cyrus Network shows Widodo’s lead intact – but the actual data is from mid‑January, a period that other polls already covered (p. 6). 

Policy News: Coordinating Maritime Affairs Minister Lt Gen (ret) Luhut Panjaitan urged greater state investment in geothermal power (p. 7).  Protecting consumers from misleading practices by property developers will reportedly be the focus of two forth­coming regulations (p. 8).  The IA-Cepa is reportedly due for signing on 4 March (p. 9).

Infrastructure: The Jakarta Mass Rapid Transit (MRT) will ramp up operations during a trial from 12-24 March, with commercial operations expected by end‑March (p. 9).  Press reports hint that the China‑financed Bandung fast train project may have overpaid for land in Bekasi, thereby complicating acquisition of nearby land needed for the Jakarta-Area Light Rail Train (LRT) project, which faces delay until April 2021 (p. 9). 

Economics: The trade minister touted FTAs (p. 11).  Upstream Regulatory Agency (SKK Migas) officials expressed optimism about investment flows into oil and gas (p. 12). 

Outlook: Although the winner is not yet clear, the loser thus far in the presidential election appears to be the international community.  Pronounced anti‑foreign rhetoric from the Prabowo camp threatens to cow policy­makers and jeopardize prudent economic management.  Excessive skepticism of international engagement would come at an awkward time: the current account deficit requires capital inflows, while protectionism would augur lower growth (p. 12).