Expecting stock market to remain resilient

Earnings picture still encouraging

Around 94% of our coverage has announced 1Q16 results with aggregate net profit growth of 5.8% YoY, despite lower 2.3% QoQ, partly on earnings seasonality.  The aggregate reported earnings of companies under our coverage totaled Rp57.2tn in 1Q16 vs. Rp54.1tn in 1Q15. Most of consumers, banks, telcos and contractors reported positive results while automotive, heavy equipment, cement, plantation and mining companies mostly reported earnings miss. Post earnings result, we see there has been no significant EPS downgrade, therefore we believe earnings risks should be limited after 14-17% downgrade in 2016-17 market EPS since Mar-15.

​1Q16 economy not bad, valuations not to come off

The statistics bureau (BPS) announced on Wednesday that Indonesia’s economy expanded an annual 4.92% in 1Q16, below the economist median expectation of 5.06%. Less contribution from direct investment and government spending realization were the major drags on economy growth but real private consumption managed increased to 4.94% YoY (4Q15: 4.92%). Moreover, our economist still expects the accelerations in business expansion and government budget disbursement in the following quarters. Expectation of strong economic growth was among the main reasons that market multiples were able to sustain current valuations range of 15.9-16.5x forward PER in the past two months.

Keep flowing in

In terms of capital flow, we saw a total accumulated foreign fund flow of USD5,038 mn as of end-April (the YTD highest level) . We reckon that the strong inflow was partly a result of lower inflation and BI rate that trigger Indonesia’s bullish bond market while Indonesian bond returns were relatively the highest among their peers. On equity market, foreign buyers continued to buy Indonesian equities to an accumulated figure of USD494 mn to 25-April but they started offloading their position after that, bringing end-April position to USD338 bn, which were arguably due to some unfavorable 1Q16 earnings results.

Our stock picks gained 13.6% in 4M16

Our stock picks posted average return to 13.6% in 4M16, continue rising from 11.8% in 3M16. It also far outperformed the JCI’s return of 5.3% in 4M16, with 5 out of the 10 stock recommendations beating JCI by 20%-38%. Outstanding performers were found in our transportation recommendation (GIAA posted 43% return), construction (with WSKT and ADHI being up by 40% and 25%) and consumers (INDF and GGRM gained 38% and 26%).  In April alone, major contributors to our stock picks return were WSKT, which jumped 17% and GGRM, which gained 6%.

Maintaining JCI target of 5,550; incorporating defensive names into picks list

We believe that the current market strong performance has further legs going forward as good macro data will likely lift investor sentiment. We believe the risk/reward ratio will not deteriorate, as JCI is now trading at 15.9x 2016F PE, still below +1stdev of historical mean. Therefore we retain our YE-16 JCI target of 5,550. Taking the above points into consideration, we are keeping our preference for exposure to domestic demand. We refreshed our top buy list with consumers (INDF, LPPF,GGRM), and construction companies (ADHI, WSKT, PTPP). To minimize potential headwinds we are adding defensive names like SILO and EXCL, replacing GIAA and TMAS.