FOCUS (03-Mar-2011) Strategy:Fuel subsidy likely will stay - Mandiri Sekuritas

In February, JCI turned positive (+1.8% MoM) and we expect this positive sentiment to continue in March. We grew optimistic due to improved GDP outlook boosted by delay in the reduction of fuel subsidy, which will lead to less inflationary pressures. The delay in the subsidized fuel rationing will be positive for the JCI in the short term. In the longer term, however, pent-up inflation will continue to overshadow the optimism. The sectors which underperformed the JCI in February were construction, infrastru cture, a nd agriculture. While the biggest outperformer was trading and services. We still like commodities especially coal. Also, despite our neutral call, we grew more positive on the consumer and financial sectors. We are still negative on cement (basic industry) and property. Our picks are: Bumi Resources, Indofood, Gudang Garam, Bank BRI, and Mitra Adiperkasa.

Better month but slower trading. IDX posted a positive 1.8% MoM return with trade and service sector posting the biggest MoM gains of 5.6%, followed by miscellaneous industry (+5.4% MoM), and basic industry (+3.8% MoM). Trade and service was the only sector that still book ed a pos itive return on ytd basis (+5.5%ytd), while the sectors, which ytd still outperform the JCI (-6.3%ytd) were mining (-4.5%ytd), miscellaneous (-4.8%ytd), and consumer (-5.2%ytd). Average daily trading was Rp3,432bn for Feb11, much smaller than Jan11 (Rp4,950bn), or Dec10 (Rp3,959bn). Threat of inflation created overhang. No major progress on the government initiatives or programs is also not helping the sentiment.

Govt backtracked on its fuel subsidy rationing plan. We think there is less chance for the government to continue with its plan to limit consumption of subsidized fuel or increase fuel prices. Recent changes in political landscapes, marked by the breakup in the coalition, will lik ely force the government to adopt more populist policies. This will help alleviate inflation concerns. Consumer price inflation reached 0.13% mom or up 6.84% yoy in Feb11, lower than our and consensus estimates of around 0.4% mom or 7.12% yoy. The Jan-Feb11 accumulative inflation reached 1.02%. Lower inflation was triggered by decline in food and clothing prices, which dragged down the headline reading by 0.09ppt and 0.01ppt respectively. We expect BI to keep the benchmark rate unchanged at 6.75% in the next board meeting on Friday (4/3).

Anecdotal evidences indicated strong economic growth continued. In February, electricity peak demand in the Java-Bali system reached its highest level ever (18,270MW), higher than the previous record of 17,890MW in 2010. Car sal es reach ed its monthly highest sales ever of 73,849 units. Mitra Adiperkasa, a mid-segment fashion and F&B retailer, enjoyed strong SSG sales in January of 10%. In Q410, the GDP registered 6.9% yoy expansion, beating forecast of 6.3%.

Our picks for the month: coal and consumer. Expectation of good prices set for Japanese coal consumers, and the general positive sentiment arising from the consummation of Vallar deal will be the catalysts for the coal sector in March. As for consumers, positive sentiment will com e from Indofood, as it’s preparing for the float of its unit Salim Ivomas, and slower inflation pace.