Selective Stock Picking

Plenty of risks remain for equity markets this year, Syailendra Capital sees some selected good buys amidst the volatility.

Last year was a challenging time for stock investors as the European crisis shook the global economy. Most markets were flat or down—with Indonesia one of the few markets showing gains, with the Jakarta Composite Index up 3%. The only other two major markets in the world with gains were the U.S.’s Dow Jones index, up 6%, and the Philippines, up 4%.

With the crisis far from over, the threat is still lingering this year for continued volatility and mixed results in equity markets. So where and how should investors put their money in the local stock market? Lanang Trihardian, Syailendra Capital senior investment analyst, has some ideas for 2012.

Lanang Trihardian, Syailendra Capital senior investment analyst. (Photo by Ahmad Zamroni)

Although a relative newcomer, Syailendra Capital is worth a listen. It launched its first fund in 2007 and now has Rp 4.2 trillion assets under management and its owners Jos Parengkuan, Roy Himawan and David Tanuri have more than two decades of experience. In December last year, Syailendra came into the spotlight for buying a Rp 1.35 trillion stake in the initial public offering of PT ABM Investama.

Lanang sees Indonesia as one of the most interesting countries in the world to invest, as the economy should 6% or more this year on the back of similar growth last year.  The country has also gotten some positive reinforcement from credit upgrades issued by Moody’s and Fitch ratings services, both of which place it at investment-grade level.

A big and obvious play is the consumer sector, says Lanang. Growth is being supported by domestic consumption, some 65% of GDP. As incomes rise, purchasing power is growing and so does the consumption (Indonesians also spend a large portion of their income on consumption rather than savings). Companies that can successfully sell their products or services to emerging middle-class consumers will benefit.

What is worrying is the external factors, especially if the European sovereign-debt crisis drags down the U.S. economy with it. Already 2012 is being compared to 2008, when the world economy went into a tailspin. China and India both face lower growth prospects  this year after many years of rising growth. The World Bank’s recent “Global Economic Prospects” report has cut its own target for global growth from 3.6% to 2.5% for 2012.

One piece of good news is that inflation should not be a problem. “We could see inflation trending down,” says Lanang. “So inflation is not really a problem.” The export side of the Indonesian economy, however, should get hurt by the global slowdown in demand. Export data for November 2011 appears to confirm this trend, as exports declined both on a monthly and annual basis. Other challenges for Indonesia are issues such as infrastructure, corruption and excessive red tape.

Moreover, the local stock market is no longer as cheap as it once was in terms of valuation, now somewhere around 13 times earnings. Even though other markets are more expensive, the discount of last year is gone, making Indonesia less attractive. Many investors now try to time the market, buying on dips to get a better price. “That’s why we never see a big fall in prices. Investors are waiting on the sidelines to enter the market,” says Lanang. As of January 24, the Jakarta composite index is up 3.5% to just over 4,000, an important psychological barrier. For the year, Syailendra is forecasting a rise of about 15% for the market, which will boost it to about 16 times earnings.

In picking it stocks, Syailendra put emphasis on it fundamental analysis. “We tend to pick stocks that are cheap in terms of valuation and have good fundamentals. We also look at other factors such as who is the owner, do we trust them or not, and do they pay attention to minority shareholders,” explains Lanang. He uses a mixture of his own research and that from other outfits. He likes smaller stocks that have less coverage as they often show better growth rates.

As more general rule, Lanang suggest investors focus on stock-picking this year. Even if a company has good fundamentals, one has to look at valuations. Given this year’s potential volatility, it is risky to buy stocks with valuations above the market. This rule applies across the board, even for blue chips or big capitalization stocks. “You don’t buy it if the price is too expensive,” he says. He also recommends smaller stocks with better growth outlooks than bigger ones that are more established but have slower growth.

THREE FOR 2012

Lanang has some specific recommendations for some stocks to buy this year, across three sectors of property, plantation and cement.

1.   PT Alam Sutera Realty.

Home ownership in the country is still low. With rising income, people like to own their own homes, and demand at the moment outstrips supply. Alam Sutera has a good track record of hitting its targets and its land bank in Serpong is the company’s crown jewel. Since an access road was built to a toll road, land prices in Serpong have doubled in less than two years to Rp 6 million per square meter. The developer is now looking for a similar performance in Cikupa, where it is growing its land bank from 500 hectares to 2,600 in the next five years. At 10 times earnings, Alam Sutera sells below the market and below its peers.

2.  PT PP London Sumatra

While many have cooled on plantation stocks due to declining demand, Lanang likes Lonsum (as it is called). Demand for crude palm oil (CPO) is still high, especially for use in food and as a cooking oil. On the supply side, CPO production is declining, thus supporting a price rise. Lonsum, says Lanang, will benefit from rising CPO prices and also boasts a huge land bank of 150,000 hectares, allowing it to expand production at will. Land banks have become important after the government imposed a moratorium on plantation companies acquiring new land last year.

3.     PT Semen Gresik

The cement sector could book double digit growth this year, and sales prices here are among the highest in the world. In 2011, the cement sales grew 13%. The sector’s constraint is not on the demand side but the supply side. As the country’s biggest producer, Semen Gresik is unable to keep with demand. An expansion plan to add 5 million tonnes of capacity should help, allowing Semen Gresik to grab additional share in the target markets of Java, Sumatra and Sulawesi.

* This story appears in the February 2012 issue of Forbes Indonesia magazine.

      

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