Weekend Comment Sept 13: Indonesia's shock rate hike to affect locally-listed stocks
Written by Joan Ng
Saturday, 14 September 2013 10:52
BANK INDONESIA UNEXPECTEDLY hiked its benchmark policy rate by 25 basis points yesterday to 7.25%, the country’s highest in more than four years. This is the second rate hike in two weeks and comes on the back of a weakening Indonesian rupiah and market concerns over the country’s current account deficit. Indonesia’s policymakers have also lowered their GDP growth forecasts. They now expect 2013 growth to come in between 5.5% and 5.9%, down from expectations of 5.8% to 6.2% growth previously.
Morgan Stanley economist Deyi Tan believes that Indonesia’s policy rate hike cycle is not over and she thinks the Indonesian rupiah will continue to weaken relative to the US dollar. “We think a more sustainable economic equilibrium would involve slower cyclical growth, a narrower current account deficit and a less overvalued currency,” she says. “Global macro developments have forced the hand of policymakers in embarking on policy adjustment. But the macro rebalancing process is not yet over.”
This latest rate hike, coupled with other recent policy initiatives, send a strong message to the markets that the government is willing to do whatever it takes to contain future inflation and the current account deficit, says HSBC. “This includes accepting – or even desiring – lower growth. Bank Indonesia signalled as much by unexpectedly downgrading its growth forecasts to more realistic levels,” it says.
For investors, the prospect of slower growth could be negative for Indonesia-linked stocks. The heaviest concentration of these companies can be found in the agricultural commodities space. Oil palm plantation companies Golden Agri-Resources, Indofood Agri Resources, First Resources, Kencana Agri, Global Palm Resources Holdings and Bumitama Agri are all based in Indonesia.
In a client note issued this morning, UOB Kay Hian Research reiterates its “buy” call on Bumitama Agri as it believes the company’s debt restructuring has reduced Bumitama’s exposure to Indonesia’s rate hike. The company has converted most of its rupiah-denominated debt into US dollar debt. US dollar-denominated loans now account for about 84% of its total loan book, up from 56.5% at the end of last year, UOB Kay Hian says. “The loan restructuring also helps to reduce the interest payment as US dollar loans are at lower interest rates,” the brokerage adds. Rupiah-denominated loans currently have interest rates of about 10% to 11% while US dollar-denominated loans have rates in the low single digits. For every two-percentage-point fall in rates, UOB Kay Hian estimates that Bumitama would report a 3% to 4% increase in pre-tax earnings.
UOB Kay Hian also takes confidence in Malaysia-listed IOI Corp’s recent purchases in Bumitama. IOI has purchased about 13.5 million additional Bumitama shares since the latter’s IPO, UOB Kay Hian says, taking its stake to 31.2% from 30.4% before. “This indicates the rising interest and confidence of IOI in Bumitama to continue to deliver strong production growth and earnings growth.”
Some other stocks that derive a large portion of their revenue from Indonesia are Jardine Cycle & Carriage, First REIT, Gallant Venture, Geo Energy Resources, Lippo Malls Indonesia Retail Trust, Malacca Trust, Petra Foods, RH PetroGas and Sinarmas Land.
The largest of them, Jardine Cycle & Carriage, has a business distributing automobiles and motorcycles. But it also owns 50.1% of Astra International, a diversified Indonesia-listed company with interests in plantations, mining, finance and technology. While its diversified business may keep earnings at Jardine Cycle & Carriage relatively stable, the company’s heavy weighting in the consumer space means it is potentially at risk.
Credit Suisse notes that the company has shown weak earnings momentum and that analysts have made some cuts to their 2013 and 2014 earnings estimates for the stock. However, despite these downgrades to estimates, Jardine Cycle & Carriage is still expected to report steady increases in returns on assets over the next two years. Of course, the bank also cautions that these assumptions rely on strong sales growth, which might be at risk in a slowing economic environment.
Finally, First REIT is one stock where investors might still find some measure of safety. According to a Macquarie report last month, the REIT has no rupiah exposure because its rents are paid in Singapore dollars. The REIT owns 10 hospitals and medical care-related facilities in Indonesia, alongside three nursing homes in Singapore and one in Korea. Its Indonesian assets are on long-term master leases with rents paid in Singapore dollars. The only foreign exchange exposure it has is the US dollar payments from its rehabilitative and nursing facility in Yeosu City, Korea. Those payments account for about 1% of the company’s total revenue.
Given that the healthcare sector is typically more resilient in times of slower economic growth, First REIT may be in a better position to keep commanding steady rentals and rental escalations. According to Macquarie, the REIT’s assets have base rents as well as annual rental escalations capped at 2% per annum and a variable rent based on an increase in revenue at the hospitals. Base rent and annual escalations account for 99% of total revenue.
Publish date: 13/09/13