Axis Capital Group Finance
The good, the bad & the ugly: Q3 corporate result round-up
Thus far, 82 out of 93 stocks — 71 percent of the total market capitalization of the Indonesian Stock Exchange — under our coverage have announced third quarter (Q3) 2014 results. Table 5 shows the list of the 11 stocks that have not reported, of which 9 companies are in the midst of undergoing limited review and have until the end of November to report.
On aggregate, operating profit growth for our basket of stocks, excluding the metal sector, has reached just 1.7 percent year-on-year (y-o-y), as seen table 1, a deceleration when compared with the 3.7 percent y-o-y growth reported in Q3 2013, and our projection of 9.2 percent y-o-y growth in our results preview.
However, when it comes to the bottom line, Q3 2014 net profit growth of 8.0 percent y-o-y is more or less in line with our forecast of 9.1 percent y-o-y, mainly helped by the performances of the plantation, property and oil-related sectors.
The five sectors listed in this “good” category (table 2), which have booked above-market growth rates at both the operating and net profit levels, were not surprising to us. On the metals and plantations front, our covered stocks have benefited from strong pricing and the rupiah’s depreciation. In property, most counters benefited from solid marketing sales in the past couple of years while Pakuwon Jati (PWON) surprised us with a one-off below-the-line gain, causing its bottom line to exceed our forecasts by 34 percent. From an organic standpoint, Summarecon Agung (SMRA) recorded remarkable quarter on quarter (q-o-q) revenue growth of 61 percent, helped by the completion of a township in Gading Serpong in Tangerang.
On the consumer sector, we have seen a decoupling between the performances of discretionary and staples with the latter booking earnings largely in line with our estimates (table 9). On the flipside, the consumer discretionary sector (i.e. media, retail and confectionary) mostly disappointed — note that while the Q3 2014 results of Surya Cipta Media (SCMA) and Media Nusantara Citra (MNCN) were in line with our estimates, consensus expectations were much higher than ours — investors should expect downgrades to come from the street.
In the “bad” sector, there were three industries with mixed performance in terms of operating and net-profit results (table 3) relative to the market. In the coal sector, low coal prices caused operating profit contraction on a y-o-y basis while the Q3 2013 low base effect and some below the line support (e.g. higher interest income thanks to lower capex) allowed for bottom lines to grow for Bukit Asam (PTBA) and United Tractors (UNTR).
On infrastructure-related stocks, construction growth was mainly dragged down by Adhi Karya’s (ADHI) poor performance, although other players such as Pembangunan Perusahaan (Persero) or PTPP (which saw the highest growth), Waskita Karya (WSKT) and Wijaya Karya (WIKA) were relatively in line with our expectations. As for banks, the industry in general faced margin pressures because of a combination of higher funding costs and worsening assets quality while non-interest incomes remained low at less than 30 percent of operating income on slower loan growth at 11.9 percent y-o-y in Q3 2014.
In the “ugly” category (table 4), the poultry sector was the worst performer given day-old-chick (DOC) oversupply and pressured average sales price (ASP), which led to higher sales discounts causing depressed margins. On cement, the sector suffered from not only election disruptions but also late price rises, creating margin pressure for cement players.
In the telecommunications sector, weakness was caused by strong a Telekomunikasi Indonesia (TLKM) performance in Q3 2013 resulting in a high-base effect and some consolidation on the back of XL Axiata’s (EXCL) merger. Finally, the automotive sector was hurt by margin compression and lower sales volumes on continued intense competition.
In summary, however, we think that while Q3 2014 earnings have generally been lower than expected, the market’s Q3 2014 net profit growth has remained quite robust at 8.0 percent y-o-y (table 1), displaying improvement when compared with the 2Q13 overall performance.
Nevertheless, since the release of the Q3 2014 results, our analysts have thus far made earnings changes on 16 stocks, all of which are downgrades with the exception of six stocks: UNTR, Bank Danamon (BDMN), PTBA, PWON, Sampoerna Agro (SGRO) and Semen Baturaja (SMBR).
Within the retail sector, we will also be reviewing our earnings model for Mitra Adi Perkasa (MAPI) and Ramayana Lestari (RALS) following disappointing performances.
Going forward, we advise investors to be cautious on poultry given the government’s planned fuel-price hike, which is likely to result in negative sentiment on the sector ahead of lower chicken consumption as consumers’ purchasing power is eroded. Additionally, we maintain our negative stance on the automotive and coal sectors, with the latter likely to see weak performance as pricing for 2015 contracts are normally conducted in Q4 2014, amid the current weak coal price environment.
Finally, our warning that the consumer discretionary sector would perform poorly has begun to materialize in this Q3 2014 earnings season — even before the fuel-price hike. We think there will be increased disappointment ahead from the street as analysts downgrade earnings. On a more positive note, we are encouraged that consumer staples have remained resilient and should be able to provide shelter for investors.