Citigroup Pan-Asia 2H11 Outlook - Buy the Summer Weakness for a Fall Rally (+20-25%) "INDONESIA" - Citigroup

From Inflation to Infrastructure
 Upside of 17% with stable EPS growth forecast — We remain positive on the Indonesian market, with an average expected total return of 17% for the stocks under our coverage (total market cap of US$192bn). In the past two years, the forward PER has remained relatively stable at around at 13.5x (currently +0.33 std). Future returns will be driven by EPS growth (consensus 2011E of 19-20%), with expectations of higher direct investments including infrastructure spending. Upward earnings revisions for 2011E have been led by Autos and Banks, with Telcos and Utility leading the downward revisions.
 Key triggers — With inflation fears receding, the focus is now on earnings growth. Consumption momentum remains strong, supported by bank loan growth of 23%. The other drivers of earnings are commodity prices (coal and CPO) and infrastructure spending. The approval of Land Acquisition Bill by the Parliament (scheduled for July but with increasing probability of being delayed) would be a positive signal, even if the actual results may not materialize before 2H 2012.
 GDP growth (2011E 6.5%) and falling inflation have driven post-Feb rally — Strong IDR has yielded the desired result, with CPI down to 5.98% (May) and the 10-yr bond yield falling to below 7.5%. Citi expects only one more policy rate hike of 25bps in 2H CY11 (to 7%).
 Commodity/Infrastructure plays are top picks, with selective Banks — Higher coal and CPO prices, due to structural supply/demand imbalance, will support earnings growth (prefer Adaro and LSIP). Infrastructure picks are cement producer Indocement and toll-road operator Jasa Marga (JSMR.JK; Rp3,450; 1L). Our top Buy in Banks is BMRI, due to its diversified exposure.
 Inflation is the key risk — Decision to absorb fuel subsidy in the budget has eased immediate pressures. Medium-term risk is delays in capacity additions to match rapid demand growth. Political risk remains low, for the time being at least, but we do expect changing alliances as the 2014 election approaches.