Jakarta Stock Exchange getting more attractive

JAKARTA (JP): By the end of 1994, we expect the Jakarta Stock Exchange (JSX) composite index to decline by about 20 percent from 589 points in 1993. This is a sharp contrast from last year when the market grew by 115 percent to become one of the best performing markets in Asia.

The JSX has fallen from a high of 613 in January to its lowest point this year -- at 447 in December. While the highly successful Indosat initial public offering has brought worldwide attention to the Indonesian stock market, it failed to spark off a broad-based rally, widely expected by investors, as a result of interest rate hikes in the U.S.

The active primary market should make the Indonesian stock market more attractive to investors by expanding market capitalization and improving liquidity in the long run. A total of 47 companies have been listed on the JSX in 1994. This put the total number of listed companies at 226 as of November, from only 24 companies in 1988.

Total market capitalization has also increased from Rp 482 billion in 1988 to Rp 103 trillion (US$48 billion) at present. Total funds tapped in 1994 were about US$4.8 billion, mostly through rights and initial public offering (IPO) issues, a more than two-fold increase from $2.1 billion in 1993.

Despite the rapid growth in recent years, the Indonesian market is still considered small, and has much potential for further growth, relative to its GDP, compared to other markets within the region. Hence, we expect the Indonesian stock market to become the largest in the region within the next 10 years.

Upward pressure on domestic interest rates, as a result of U.S. interest rate hikes throughout the year, have prompted banks to increase deposit rates from an average of 12.3 percent at the beginning of 1994 to the current 14.5 percent.

Total bank lending as of October 1994 stood at Rp 179.16 trillion, which was a 20.8 percent increase from the end of 1993. Lending over 10 months in 1994 outpaced the previous year's 12- month growth of 19.9 percent, 8.9 percent in 1992, and 16.3 percent in 1991. This was attributed to the private national banks, which posted a growth of 34.5 percent during the period against 21.1 percent for foreign banks, and only 9.9 percent for state-owned banks.

State banks are still struggling with bad or doubtful loans which have reached from 20 percent to 25 percent of total outstanding loans. Another concern is loans to the property sector which are estimated to have grown twice that of total bank loan growth. In the next 12 months, interest rates are expected to rise by 1.0 percent to 1.5 percentage points, given the strong possibility of further interest rate hikes in the United States.

We expect banks to maintain their profit margins by adjusting up their lending rates. However, lending rates will still be at the lower end of their historic scale, and given the consistent strong demand for credit, we expect similar loan growth for 1995.

Banking stocks are currently trading at the fairly attractive 1994 P/E (price earning ratio) of 9.0 times and 1995 P/E of 7.7 times, compared to the market average of 18.4 times and 1995 P/E of 14.7 times. We recommend that investors focus on the more liquid banking stocks, which have raised funds either through rights or IPO issues in the last 12 months. These banks should be able to expand their loan book at a faster rate, and achieve higher margins. These include BDNI, BII, Bank Danamon, Lippo Bank, Bank Tiara, and Bank Rama.

Generally, the level of confidence in the property market remained high throughout 1994. Investments in new property projects continue to increase with market demand. Return on investment on property ranged between 7.5 percent and 8 percent.

In June 1994, the government relaxed the plot ratios to 5:1 which allowed building heights to exceed 32 stories, this allowed some developers to increase the size of their projects.

On the residential sector, demand for landed properties was strong throughout most of 1994. Companies with the majority of their property portfolio in real estate development, such as Jaya Real Property, Modernland, and Ciputra Development, are most likely to achieve their sales projections. Most of these stocks have been able to maintain their stock prices above their IPO level.

Interest in apartments and condominiums has increased in 1994, but the market may be swamped by an additional 40,000 units expected to be completed within the next four years. With the threat of an excess supply of apartments, some projects may have to be delayed or abandoned.

The outlook for the office sector does not appear to be too exciting due to an oversupply in the market. However, the retail property sector remains promising as the Indonesian economy is expected to show a healthy GDP growth, supported by strong growth in consumer spending and private consumption.

The industrial sector also appears to be bright as more developers are moving into development of satellite cities outside of Jakarta or other big cities across Java island.

Over all, the property market outlook for Indonesia is good, with most major activities concentrated in the Greater Jakarta area. However, rising interest rates, oversupply of apartments, and cement shortages are expected to be the main concern which can make property counters less attractive in the short run.

Cement shortage has become an annual occurrence, but in 1994 it was responsible for hostile and heated debates between the House of Representatives (DPR) and the association of cement producers. Ultimately, the DPR gave only a muted response to the association's decision to increase the local reference price.

It is difficult to predict whether the industry can maintain its stranglehold on the market, but the latest debacle has definitely sparked off interest among DPR members in deregulating the industry.

However, as the industry has just gotten over the shortage, there may be little incentive to implement changes to the industry in the near future.

Currently, there are nine cement-producing companies in Indonesia, with a total of 27 plants. This year, the national production capacity is estimated to have increased by 12 percent to approximately 23.6million tons a year, from 20.8 million tons in 1993. This increase was attributed mainly to increases in the production capacity of existing producers. We expect future increases in capacity to materialize through expansion of existing plants. Total national cement production capacity is expected to increase to around 40 million tons by 1998, while the narrowest margin between capacity and demand is expected to occur in 1995. Therefore, current producers are expected to gain from any price liberalization which occur before or during 1995.

Investors will be watching closely at the proposed merger of Semen Gresik and state-owned cement producers Semen Padang and Semen Tonasa. The Ministry of Finance has given its approval for Semen Gresik to do a rights issue to raise Rp 1 trillion to finance the merger and its expansion plans. By 1995, after implementing the proposed expansion plan, Semen Gresik is expected to become the largest cement producing concern, with a total production capacity of 12.3 million tons, exceeding Indocement with a capacity of 9.5 million tons.

The stock performance of listed cement producers has been quite disappointing this year. Their failure to meet earnings expectations in the last three years, could not justify their relatively high P/E multiples. As a result, the market has partly discounted the high growth expectations in 1994 and 1995.

The growing middle class of Indonesia has kept the consumer sector, which includes foods and beverages, cigarettes, photographic goods, retail items, as well as the distribution sectors, one of the best performing sectors during the year. Indonesia, with a huge population of 190 million, represents a massive consumer market, with a steady annual growth rate of 2 percent.

The consumer sector was largely dominated by the listing of Indofood in July this year. Expectation of a tremendous earnings growth of 2.6 times to Rp 255 billion in net profit, has driven the share price up to 61 percent above its IPO price of Rp 6,200. However, its disappointing third quarter results, coupled with a decline in stock market sentiment has dragged the share price down to Rp 8,150.

Rising coffee prices have also hampered Mayora Indah's earnings growth to 66.9 percent this year, from our previous forecast of 105.9 percent. Hero, a major retail stock, showed disappointing third-quarter results, due to losses from its subsidiary Toyscity, as well as delays in opening up new stores. The poor results have also driven its share price down to its lowest level this year.

In 1995, the consumer sector should remain an investor favorite. It is expected to grow by an average of 20 percent, justifying a sector average P/E multiple of around 16.8 times, which is a premium to the market average P/E of 14.5 times.

Blue-chip consumer stocks with solid earnings growth such as Indofood and Mayora are still in favor despite higher-than- average P/E ratios. Overall, strong GDP growth and lower inflation rate expectations should drive consumer demand up in 1995, which should generate higher earnings for consumer companies.

The Indonesian pharmaceutical industry is estimated to be worth around Rp 2 trillion in 1993. The industry, which is still highly fragmented, is comprised of about 224 companies, including 10 dominant companies. The single largest pharmaceutical company is Kalbe Farma, with a market share of around 9.6 percent in 1993. Presently, there are nine pharmaceutical companies listed on the JSX, of which five are foreign multinational companies, namely Bayer, Merck Pfizer, Schering, and Squibb. The other four, which have a significant market capitalization, are local companies Kalbe Farma, Dankos Laboratories, Tempo Scan Pacific, and Darya-Varia Laboratories. The later two companies were listed this year.

The industry experienced several major changes this year, as the Good Manufacturing Practices (GMP) guidelines was finally implemented after the compliance date had been delayed several times. Compliance with GMP guidelines is necessary for a company to sell its products. GMP guidelines cover several aspects like quality control in manufacturing processes and standards for maintenance of equipment. Currently, only 91 companies have met these guidelines, and 108 companies by the year's end. Companies unable to comply with these guidelines are expected to merge with compliant companies to continue production.

Over the last five years, the industry has been growing at an average of 15 percent per annum. According to findings by IMS Audit, the industry grew by around 20 percent last year. Rising disposable incomes and increasing health awareness are the two factors that attributed to greater demand for pharmaceuticals products. In addition to that, stronger government effort to improve health care standards also boosted demand for pharmaceuticals products.

Annual per-capita consumption of drugs in Indonesia is still relatively low, at $4.15 last year, compared to other Southeast Asian countries. In a country where health care standards and drug consumption are still low, the room for the industry to grow is still vast. Overall, we expect the industry to continue growing at a healthy rate of 16 percent to 19 percent in the coming years.

The pulp and paper sector has outperformed the market this year mainly due to rising pulp and paper prices. Average pulp prices have increased from $400/ton to above $600 recently, while paper prices have followed that trend.

This has encouraged two other paper companies Suparma and Fajar Surya to float their shares to public at the end of the year to finance their facilities expansion. Towards the end of the year, market sentiment on this sector plunged as a result of disclosures that highly leveraged Indah Kiat, Tjiwi Kimia and Inti Indorayon suffered huge financial losses in a series of interest rate swaps.

However, the companies later announced that the losses will be absorbed by the controlling shareholders of the respective companies: Sinar Mas group and Raja Garuda Mas group. Therefore, the losses will reportedly not affect company earnings. We believe some pulp and paper stock have been oversold, and expect this sector to recover by early next year.

The forestry sector is dominated by Barito Pacific and newly listed Sumalindo Lestari. This sector has been performing poorly due to falling plywood prices. Average plywood prices have dropped from $450/cu.m to a low of $350/cu.m. Apkindo, the Plywood Producers Association, took it in its stride as the body that oversees the plywood trade. Indonesian plywood exports faced serious competition from Malaysian producers, as well as decreasing demand in major buying countries such as China and Japan.

In 1995, we expect at least three timber companies: Artika Optima Inti, Surya Dumai, Kiani Lestari, to seek a public listing. Under guidelines introduced recently, timber companies do not require the Minister of Forestry recommendation letter for public listings, but must be assessed by Societe Generale de Surveillance (SGS) for their business viability and ability to sustain the manufacturing capacity with their existing forest concessions.

Indosat made its debut as the first Indonesian company to list its shares in Indonesia and New York with an IPO of 362.4 million shares; making it the largest Indonesian offering to date. As a result of the dual listing, Indosat share price on the JSX follows closely to the price movement on the NYSE. In December, Citra Marga, an inner Jakarta toll-road operator, offered 122 million shares to the public to raise Rp 317.2 billion. In the same month, Bukaka Teknik Utama, a job shop manufacturer of infrastructure products, offered 40 million shares which raised Rp 128 billion.

The government has stated that Indonesia must invest about $50 billion in infrastructure development over the next five years. To meet this objective, the government realized that it could not depend on conventional loans to finance its development plans. We expect the government to tap private capital, through direct or indirect investments, to finance infrastructure-related development.

Therefore, next year we can expect several major infrastructure companies like Telkom, State Electricity Company, and Jasa Marga to seek funding through the capital market.

We expect the Indonesian economy to continue to grow at a healthy rate of 6.8 percent in 1994 and 7.0 percent in 1995, supported by strong private consumer sector growth and manufacturing production.

An inflation rate of about 9.5 percent for 1994 is higher than earlier expectations mainly due to rising prices in rice and sugar caused by drought, electricity tariff hikes and cement shortages.

The economy is showing no signs of overheating, and we expect inflation to ease steadily to about 8.9 percent next year. The gradual increase of oil price should boost export revenues, as oil and gas contribute about one third of exports, which should stabilize Indonesia's trade balance in 1994 and 1995.

The market has strong support at the 450 level. As in previous years, the market is expected to move sideways in the next few weeks as trading activities will be minimal during the festive season between late December and early January. Assuming no surprises from the U.S. central bank, the stock market should begin a gradual recovery by the second quarter as companies begin to announce their annual results, reflecting the positive key economic indicators of Indonesia.

-- Research Department of PT Sigma Batara

Window A: The performance of listed cement producers have been quite disappointing.

Window B: The pharmaceutical industry will grow by 16-19 percent in the coming years.