Extended mobility restriction to delay recovery

President Jokowi announced the extension of Emergency Mobility Restrictions (EMR or PPKM Darurat) till July 25 due to resurging Covid infections. The number of newly Covid-19 cases in Indonesia reported a record of 56,757 on 15 July, while total cases has reached 2.98 mn yesterday. This is due mainly to the increased mobility of people during and after the national holiday season earlier in May, as well as the spread of the Delta variant of the corona virus in Indonesia. Our economist believes surging infections has delayed the anticipated recovery in the domestic economy and decided to cut his 2021 GDP forecast to 3.5% from 3.8% previously. After witnessing a 0.7% GDP contraction in 1Q21, our economist sees an expansion of 5.9% YoY in 2Q21, due mainly to the low base effect,  followed by lower growth of 3.3% in 3Q21 affected by EMR and 5.5% growth recovery in 4Q21.  


2021-22F market EPS growth slashed

Subsequent to 5M21 banks earnings release, our banking analyst cut banking sector earnings forecast by 3.8% and 2.2% to Rp104 tn and Rp136 tn owing to higher-than-expected provisioning. However, we take comfort that banks have started to make pre-emptive provisions based on changes to macroeconomic factors. This also followed by other earnings downgrade by our consumer and retail analysts on weaker SSG following resurgence of Covid-19 and the implementation of EMR. As banking sector’s earnings formed 43-45% of our 2021-22F universe earnings, our 2021-22F aggregate earnings growth are lowered to 37-23% (from previously 41-22%) to Rp243-298 tn (Exhibit. 2), translating to new 2021-22F market EPS of 360-442. Meanwhile, our 2021F EPS is still below pre-Covid-19 level of 386 and would revert to that level in 2022.


Our 2021 JCI target revised down to 6,600

We believe clarity is still lacking with regards to the extent of the damage the pandemic has inflicted on economy and businesses as the situation is quite fluid at this juncture. The fight against the pandemic is far from over as positive cases remain numerous while Indonesia’s fully vaccination rate is still low at 6.1% (vs. global rate of 13.2%) according to Our World in Data website (Exhibit.4). Perhaps market stability will only emerge in 4Q21 when the vaccination program is at an advanced level. Therefore, based on lower market EPS forecast, we reduced our year year-end 2021 JCI target to 6,596 (rounded up to 6,600) from previously 6,750, which is based on 2022F PER of 14.9x (-0.5 stdev). We expect range-bound trading to continue into 3Q21 with a pickup in momentum in 4Q21.  JCI is trading at 2022F PER of 13.7x vs. historical average forward PER of 15.9x (Exhibit. 3). Our new JCI target offers 9.3% upside from current level but only 1.4% since January’s peak level of 6,505.


Sectors and stocks selection

We remain geared to economic recovery themes and we are Overweight on banks, consumer staples, telco, cement, tower, metal, heavy equipment, automotive, healthcare, plantation, shipping, property, and media. We are Neutral on construction, retail, coal, toll-road, and poultry. We assign an Underweight rating on cigarette and aviation. Our top picks are BBRI, ARTO, TLKM, ASII, TBIG, MDKA, SMGR, TAPG and IMPC. Downside risks to our call: Many different and more virulent Covid-19 variants may prolong the reopening of the domestic economy. Upside risk to our call: Huge sentiment booster from potential listing of tech based stocks such as Bukalapak and GoTo with combined potential valuation of up to USD45 bn.