atans1

US broker bearish on Indon, bullish on S’pore

In Indonesia on 12/07/2014 at 5:20 am

In its latest ASEAN equity strategy report (written before the presidential polling date ), Morgan Stanley said that it prefers Singapore over Indonesia, global cyclicals over domestic consumption stocks, and defensives over domestic cyclicals. But on its buy list is a stock that is based in Indonesia.

Actually there is another reason to be bearish about Indonesia, short term. We may not know the result until August and a close vote may hobble the “doer” if he wins, as expected.

Back to Morgan Stanley’s report. It argues that based on profitability trends that Singapore and global cyclicals stocks’ profitability has likely bottomed out, while Indonesia and domestic consumption stocks’ profitability has likely peaked. “We believe the trend in quarterly profitability, particularly in Indonesia and Singapore, is likely to be the key incremental catalyst over the next 1-2 months. Signs of cracks in margins have emerged in Indonesia and early signs of improvement in Singapore’s profitability were observed in Q1. Consensus expects profitability to deteriorate in Indonesia and stabilize in Singapore in Q2.”

Although they said that macro developments will continue to play an important role in driving equity markets, the authors believe that incrementally, investors are likely to turn their attention to the outlook for profitability.

Consensus is expecting improvement in Singapore’s profitability in 2015 and 2016, but Morgan Stanley is more optimistic. It expects (for the stocks they cover) expect a Singapore margin (ex REITs) of 7.5% 2014, compared to consensus’ 6.9%.

Similarly for the Morgan Stanley coverage universe, the analysts estimate 7.6% for 2015, compared to the consensus estimate of 7%.

SingTel, Singapore Airlines and Indofood Agri Resources are among the stocks on its buy list.

For SingTel, it ss expecting margin improvement mainly from Optus in Australia.

For SIA, it expects operating margins to improve on yield and load factor improvements. Near-term yield drivers should come from:

i) healthy domestic market and North Asia demand, particularly from China, Europe and Australia;

ii) strategic moves to focus on mid-haul North Asian routes to avoid competition with low cost carriers on short haul, and

iii) effective capacity management to shift capacity from weak demand routes like America/Africa to Europe, Australia and North Asia.

Longer-term yield improvement from FY15 onwards should stem from i) introduction of premium economy class in 2H15, and ii) retrofitting a new cabin design on 19 new aircraft in 2015 and 2016.

As for Indofood Agri, “operational difficulties in South Sumatra are behind us” and yields in the last two quarters since 4Q13 have shown solid improvement”, which supports the call for a recovery.

“In addition, 2Q14 earnings may surprise on the upside as the Street has not fully factored in the gain from inventory destocking, we believe.”

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