Nov 14, 2016 17:09:33

Indonesia: Currency update: IDR depreciation: Don’t panic
Effects of a shallow FX market; Buying opportunities exist
Based on Bank Indonesia’s data, ytd the average daily turnover for the IDR spot market is only USD1.7bn, which is shallow by regional standards, reflecting just 0.5x of GDP (exhibit 1), one of the lowest among its regional peers. Even worse is the 1M NDF market, which only trades at USD0.7bn a day ytd. Unfortunately, the NDF sometimes can influence the spot market, particularly on pressure stemming from the recent Trump election. However, given such illiquidity, we advise investors to remain calm, particularly as we believe the fundamentals in Indonesia remain largely unchanged. We note that, through years of balance sheet repair since the 1998 Financial Crisis, the Indonesian stock market’s net gearing has improved from more than 150% back then to 27.3% in 9M16. Furthermore, we believe Indonesia is currently in a good position given that its 3Q16 CAD of 1.86% is the lowest since 1Q12. In fact, we think the current situation presents buying opportunities for investors as we expect the IDR to become stronger by year-end. It is worth pointing out that there should still be around USD10bn to come in from tax amnesty repatriation between now and the end of 2016.

Sensitivity analysis: 1% weaker IDR = 0.9% market EPS
Given recent IDR gyrations, we present our latest currency sensitivity analysis on the IDR/1USD, in an effort to aid investors in better gauging their investments in Indonesia. Our study, based on 87 non-financial stocks under our coverage (62% of total JCI market capitalization), shows that each 1% IDR depreciation could lower the EPS of our covered stocks by 0.9% overall (exhibit 5). That said, it is not a surprise that a recent 3% negative swing in the NDF market spooked investors, as it could translate into a 3.6% wipeout in 2017 market EPS growth.  

Winners: Coal, Metals, Oil & Gas and Plantations

A stronger dollar should in general spell good news for sectors with dollar revenue such as Coal, Metals and Oil & Gas and Plantations (exhibit 5). By stock, our sensitivity analysis indicates that $SIMP, $WINS, $TBLA, $PTBA and $SGRO should be the major beneficiaries of IDR deprecation within our basket of stocks (exhibit 2).

Losers: Poultry, Property and Consumer Discretionary
Against a backdrop of a weaker IDR, sectors with large USD costs and borrowings should suffer: Poultry, Property and Consumer Discretionary (exhibit 5). Stock-wise, losers of a stronger dollar include heavily leveraged companies under our coverage: $SMCB, $LPKR and $MAPI (exhibit 3).

Safe havens: Mainly Construction and Telcos  

For investors seeking shelter from currency volatility, we point to the Construction and Telco sectors (exhibit 10 & 24). In terms of stocks, $JSMR, $SCMA, $SIDO and $WSKT (exhibit 4) should have their earnings relatively least altered by FX swings.