Business News

The 2013 third quarter (Q3) result season is just around the corner, with PT Bank Negara Indonesia (BNI) being the first listed Indonesian company to schedule an analyst meeting to discuss the last quarter’s performance on Oct. 18.

Given current market volatility, we think Q3-2013 earnings will be an important market determinant going forward.

Hence, to help investors better gauge performances within our covered stocks, we have conducted Q3-2013 result previews.

Unfortunately, for the market as a whole, we see deteriorating year-on-year (y-o-y) operating and net profit growth to low single digit levels (exhibit 1).

While overall market sentiment could be adversely impacted, there remain bright spots within various stocks and sectors, as discussed below.

While there are seven “good” sectors (those with earnings growth higher than market performance): metals, poultry, property, consumer, banks, infrastructure and cement (exhibit 2), only selective sectors will probably get investors excited and provide support for share price performances.

We note that the Q3-2013 performance of the metal sector was actually weak at the operating level due to unexciting metal prices with bottom line support mainly coming from foreign exchange gains.

On poultry, we expect strong performances due to seasonality (Lebaran) and high day-old-chick/broiler chicken prices.

For property and cement, we see some deceleration in terms of year-on-year growth due to a high-base in Q3-2012 earnings.

On the flip side, we see a rebound in consumer performance mainly due to the adverse impact of PT Gudang Garam’s poor result in Q3-2012, due to higher raw material prices.

Within the banking sector, we see y-o-y growth deceleration caused by slower loan growth as banks become more prudent on fears of higher non-performing loans on higher interest rates, expected higher credit cost and surging permanent personnel hiring.

Finally, in infrastructure, PT Jasa Marga was hurt by a higher wage hike as labor accounts for 37 percent of the total cost of goods sold.

In the “bad” sector, only two sectors appear (utilities and oil and gas), where we saw mixed performances in terms of operating and net profit results (exhibit 3) relative to market performance.

On utilities, bottom line erosion was mainly attributed to by foreign exchange (forex) losses from two telecommunication companies — PT Indosat and PT XL Axiata — due to their US dollar-denominated borrowings.

At the other end of spectrum, growth support for the sector stemmed from PT Perusahaan Gas Negara due to the gas price hike at the end of 2012.

In oil, the sector is mainly skewed toward PT Medco Energi Internasional’s performance, with weak operating profit caused by lower production volumes in aging fields, while net earnings were helped by a divestment of loss-making subsidiaries.

In the “ugly” category, there are three sectors (exhibit 4), reporting contracting y-o-y operating and bottom line performances.

In the auto industry, there are margin contractions from a lower average selling price and intense competition on both two wheelers and four wheelers.

For heavy equipment, we see lower volumes as coal mining firms delay expansion plans and mining divisions hold back coal sales on current unattractive prices.

On coal, we expect year-to-date, severe market underperformance, the worst in our coverage, to persist on continued policy risks (higher coal royalties toward mining business permit holders), which should impact PT Bukit Asam most, not to mention domestic demand being unlikely to pick up due to no new contracts from PT Perusahaan Listrik Negara until 2015.

On plantations, reversals from growth in Q3-2012 to earnings contractions in Q3-2013 were due to the lower average selling price caused by increased crude palm oil supplies/unexciting demand and higher production costs due to higher minimum wage hikes.

Senior associate director head of equities and research.

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