In this briefing:
- Ramayana Lestari Sentosa (RALS IJ) – The Changeling – On the Ground in J-Town
- Resource Export Earnings Repatriated / Sulawesi Flood / BTP Free / Tax IT / MRT / Electoral Agencies
- Monthly Geopolitical Comment: Too Early to Expect Lasting Improvements in US-China Relationship
- Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months
- Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick
1. Ramayana Lestari Sentosa (RALS IJ) – The Changeling – On the Ground in J-Town
A visit to Ramayana Lestari Sentosa (RALS IJ) in Jakarta confirmed that its positive transformation continues, as it strives to move up the value chain, bringing in more consignment brands and reassigning space to complementary tenants in its stores to draw in the crowds. This is reducing its heavy dependence on Lebaran sales, as it moves up the value chain to attract a slightly more affluent customer.
Ramayana Lestari Sentosa (RALS IJ) continues to upgrade its stores and bring in new tenants, such as cinemas and F&B such as Starbucks, as its closes loss-making supermarkets. A revamped store is expected to see a 20-25% sales enhancement. It will transform a further 30 stores in 2019, including cinemas into the mix.
The company continues to see strong performance from its consignment and fashion sales, with the drop off in supermarket sales lessening and this business no longer losing money.
Ramayana Lestari Sentosa (RALS IJ) strives to be the leader in providing fashion for the masses and continues to use celebrities to endorse its own brands.
It has decentralised sourcing of products and incentivised stores managers at the EBIT level rather than for sales. It has also introduced a strict process for discounting, which is enhancing profitability.
The company will introduce a further 20 new consignment brands in 2019 to help grow this side of the business and move up the value chain. Shoes are one of the most important growth categories.
Ramayana Lestari Sentosa (RALS IJ) is in the midst of a significant metamorphosis, which could see the company truly realise the value of its nationwide franchise, and move up the value to become less reliant on Lebaran sales. It continues to transform its store portfolio, introducing more consignment vendors and complementary tenants into its stores to increase footfall. According to Capital IQ consensus, the stock trades on 18.3x FY19E PER and 17.3x FY20E PER, with estimated EPS growth of +9% and +6% for FY19E and FY20E respectively. These growth expectations look to be conservative given the positive direction that management is taking both on its merchandising, brands, and tenant mix.
2. Resource Export Earnings Repatriated / Sulawesi Flood / BTP Free / Tax IT / MRT / Electoral Agencies
Politics: Corruption moved to the fore of campaign sparring, as National Mandate Party (Pan) founder Amien Rais accused President Joko Widodo of “crimes of omission”. The attack may reflect mounting grounds for concern about the poll position of Pan, which risks suffering exclusion from the next parliament. Prabowo Subianto and his campaigners continue to issue vague insinuations, rather than highlighting the plain fact that four active investigations are embroiling Widodo‑government ministries (Page 2). Basuki Purnama left prison and asked to be called ‘BPT’. Megawati’s cool treatment of the former Jakarta governor reflects her diffidence about championing pluralism (p. 3).
Disasters: Flooding has killed dozens and displaced thousands in 10 districts of South Sulawesi, including Makassar. The governor faults past management of watersheds (p. 4).
Electoral System: Yet again, the State Administrative Court (PTUN) has contradicted the General Election Commission (KPU), putting the latter at odds with the Election Oversight Agency (Bawaslu) in a case pertaining to Oesman Sapta Odang (OSO), the Hanura chair who is speaker of the Regional Representatives Assembly (DPD). Although OSO is disreputable, Hanura is tiny and the DPD virtually powerless, the case nonetheless poses risks for the KPU’s prestige and effectiveness (p. 5).
Justice: The spiritual leader of the former terrorist organization Jemaah Islamiyah (JI), Abubakar Baasyir, has not yet won release. He must first issue a written statement declaring loyalty to the Republic of Indonesia and the pluralist state ideology Pancasila (p. 7).
Policy News: The president finally enacted a long-planned regulation to require natural-resource exporters to recycle their foreign-exchange earnings through domestic banks. Some coal producers complain that the move conflicts with the terms of their offtake-and-financing agreements. But the measure holds promise for rectifying the tight onshore dollar liquidity that has long rendered the rupiah highly volatile (p. 9). A new tax IT system is undergoing procurement, with full deployment targeted for 2023 (p. 11).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>. |
Jakarta: The March opening of the MRT – and all 13 stations – is on schedule (p. 12).
3. Monthly Geopolitical Comment: Too Early to Expect Lasting Improvements in US-China Relationship
In our base case, we do not expect the trade war between the US and China to end soon. The next bilateral meeting between Liu He and US Trade Representative Robert Lighthizer is scheduled at the end of this month. If the Chinese side is hoping to placate the US with promises to purchase US commodities, this is unlikely to be sufficient to achieve a lasting improvement in the relationship. We are sceptical that the Chinese leadership will agree to launch structural reforms under pressure from the US.
Elsewhere, we are concerned with growing geopolitical and security risks in Nigeria where both presidential and parliamentary elections are scheduled in February. The relations between Turkey and the US have also soured ahead of the Turkish local elections. In Poland, the assassination of the Gdansk mayor put the polarisation of the society into the spotlight ahead of the parliamentary elections due this autumn. There are signs that the US is about to ramp up pressure on Russia after newly elected Democratic House members filled their seats earlier this month.
4. Semiconductor WFE Billings Decline Reverses Course in December, First Bullish Signal in Six Months
On January 24’th 2019, SEMI announced that Wafer Fab Equipment (WFE) billings for North America-based manufacturers of semiconductor equipment amounted to $2.11 billion worldwide in December 2018. This represents an 8.5% MoM increase, although still lower YoY by 12.1%. December’s data marks the reversal of a six month long downtrend in monthly billings, a bullish signal that the WFE segment has bottomed and better times lie ahead.
This latest billings data coincides with WFE bellwether Lam Research (LRCX US)‘s latest earnings report which slightly exceeded guidance with revenues of $2.5 billion, up 8.7% sequentially. On the call, company executives stated that first quarter CY 2019 would mark the trough from a gross margin perspective, strongly implying that it would be the same for revenues.
LRCX shares surged 15.7% in overnight trading triggering a rising tide that lifted large swathes of semiconductor stocks, particularly those within the WFE sector. Two swallows don’t necessarily mean it’s Spring, but for now, the markets are betting that it does.
5. Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick
Over the past three years, an aggressive price war has pushed Indonesian data prices down 80% to unsustainable levels. With the exception of India, and Jio’s moves there, Indonesia now has the cheapest data in markets we track globally. However, there have been signs recently of tariff stability, with Telkomsel’s tariff rising 7%. Investors’ main concern, and the key risk to being bullish on the sector in Indonesia, is the risk a price war breaks out again. We think that is unlikely. The smaller telcos are not making sufficient returns to cover capex and finance costs and market share gains alone will not save them. Something needs to give: either prices rise and/or smaller players consolidate. Rumors swirling around Indosat (ISAT IJ) in recent days suggest consolidation may be under consideration again.
Our view is that the price cycle has turned in Indonesia and consolidation is likely. That underpins our positive view on Indonesian telcos. We look for Telkom Indonesia (TLKM IJ) to deliver strong growth from its two major engines: mobile through Telkomsel and fixed line (broadband). The stock has done reasonably well since mid-2018, but we see upside and rate the shares a Buy with a raised target price of IDR5,250. We continue to like the re-rating story at XL Axiata (EXCL IJ), and remain Buyers with a price target of IDR5,200. Indosat’s share price has soared in recent days and we have now cut the stock to a Sell with the target price retained at IDR2,040.
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