Daily Indonesia: Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges and more

In this briefing:

1. Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges
2. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low
3. Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town
4. Uzbekistan Initiation: Value Hidden in Plain Sight
5. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending January 17, 2019

1. Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges

BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes.  Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy.  Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform.  Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation.   A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%.  Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT. 

Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade.  Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy.  Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants.  The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices.  Widodo unveiled a plan for a National Legislative Center (Puslegnas).  The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2).  The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15).  Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor.  At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16). 

Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage  points in late December.  It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support.  The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17). 

Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta.   A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).   

Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit.  In part, the deficit reflects Indonesia’s considerable economic momentum.  Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20). 

2. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low

Trawling through  >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.

While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?

Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.

Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.

Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.

3. Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town

Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt. 

The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.

The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.

The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few. 

After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively. 

4. Uzbekistan Initiation: Value Hidden in Plain Sight

Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:

• Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade.  However, there still is foreign interest in the market.
• The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high. 
• Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs.  This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
• Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
• Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
• Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.

The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing.  Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency.  My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan.  Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market.  The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.

5. Business Happenings in the Americas that May Be “Below the Radar” – Week Ending January 17, 2019

Highlights of significant recent happenings include: