Ø Our 2011-year-end target for JCI is 4375 at 17.41 PE11 with overweight in plantation, coal and banking, based on target market capitalization and target net profit of stocks in our valuation universe
Ø JCI has advanced 44% in 2010, driven by sound economic figure, investment grade rating from Japan Credit Rating Agency and low inflation. We expect similar circumstances would carry on in 2011. Investment grade rating will lower Indonesia’s country risk premium and will allow institutional investors who avoid junk bonds to invest.
Ø With expectation that interest rate will hover near 2010 level, we positively expect that the stock market will mimic the 2010 valuation. We forecast that central bank will raise BI rate by 50bps in 2011 and the benchmark interest rate will reach 7% at end of 2011 (See Our Economic Outlook, December 2010). Mild interest rate hike couple with lower country risk premium are a good combination to create a stable or lower discount rate thus it will further upgrade JCI’s valuation.
Ø Commodities will be back on stage in 2011 as we believe the uptrend movement of commodity price just starts in 2010 and will continue in 2011. Improved demand and potential supply shortage will support commodity price to get higher. Meanwhile the weak US dollar has also prompted many producers to raise offers to hedge against currency exchange losses. We maintain our call on CPO and coal. For domestic play, we take banking stocks.
Ø Stock picks : We have AALI and LSIP for CPO stocks, while we have BBNI, BMRI, BBRI and BBTN for banks and PTBA, ITMG and BUMI for coal mining.
There is still risk that inflation is beyond everyone’s prediction. Pro-long rainy season and growing demand could lead to higher commodity and food price. Fear of hike electricity prices would also give pressure to inflation in 2011. If this happens, it would also hurt the stock’s valuation.
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