Credit Suisse Indo: CPI flat 7%, Upgrade Buy GGRM, FY2010- Take Profit ADRO Buy EXCL!

1) ECONOMICS: January Inflation 7.02% YoY flat to December Inflation 6.96% YoY
iSay: Given January CPI flat 7% while January Core Inflation slightly lower to 4.2%, BI rate is likely flat 6.50% on Friday 4th February. Robert Prior-Wandesforde is forecasting Core CPI to exceed 5% in February data and CPI may touch 8% mid-2011F (average 7.5% 2011F). Since 2000, the headline CPI rate has averaged 8.2% in Indonesia, while average Core CPI rate 7.3%. Robert is forecasting BI rate to increase 100bps starting from March to 7.50% end-September, having been flat 6.50% since August 2009. Technically, I see JCI Index to range bound (3,300pts – 3,800pts) until March and I am recommending Selective Buy Coals (ITMG PTBA BORN & UNTR), Auto (ASII), Banks (BBCA, BBNI-, BMRI), Telecom (ISAT & EXCL), Cement (SMGR & INTP) and Undemanding Consumer Staples (GGRM and INDF). I continue to recommend TAKE PROFIT overvalued Consumer Staples (UNVR & KLBF), CPO (AALI, LSIP & IFAR SP) and Metal (INCO & ANTM)!

·         Bloomberg: Indonesia’s inflation accelerated in January, putting pressure on policy makers to consider raising the benchmark interest rate from a record low in coming months even as they may avoid an increase when they meet on Feb. 4. Consumer prices rose 7.02 percent last month from a year earlier, after a 6.96 percent gain reported earlier for December, Central Bureau of Statistics data showed in Jakarta today. That’s more than the 6.81 percent median forecast in a Bloomberg News survey of 21 economists. Consumer prices in Indonesia climbed 0.89 percent in January from the previous month. Core inflation was 4.18 percent in January, easing from 4.28 percent the previous month.

·         Bank Indonesia has kept its policy rate at a record-low 6.5 percent since August 2009, delaying an increase that could attract more funds at a time when emerging markets are luring investment. Still, the central bank has signaled it may be getting ready to consider a move as core inflation accelerates.

2) GUDANG GARAM (GGRM): Report – Upgrade to Buy on undemanding Valuation!
iSay: After January +2% ASP increase, Ella expects further ASP increases to cover excise tax and Inflation costs increases (2011F ASP forecast +8% vs Excise tax +6.5% while in 2010 ASP +10% vs Excise +8%). Short-term catalysts are 4Q2010 Earnings announcement by end-March and 1Q2011 Earnings announcement by end-April. Current DCF Target Price Rp53,000 is based on Long-term Risk-free rate 8.0%, but based on current 8.9% 10-years T-Bond Yield the DCF will remain attractive at R45,000! At Rp37,250, GGRM is trading undervalued 14.2x 2011F PER with +21% EPS Growth, 2.1% 2011F Dividend Yield and implying hugh 42% upside to DCF Rp53,000 (20x 2011F PER). BUY GGRM!

·         Ella Nusantora (Report attached): Upgrade rating. GG share price has been under pressure, as have other consumer stocks, after an outperformance last year. At the current level, we believe that the valuation is undemanding, and it is time for investors to take a look at the company again. We maintain our DCF-based target price of Rp53,000, which equates to 20.2x P/E 2011E with 21% estimated earnings growth this year. It provides 40% potential upside, which warrants us to upgrade our rating to OUTPERFORM.

·         We believe that the company’s fundamentals are still intact, with an estimated 8% ASP increase in 2011 on 3% higher volume growth. The recent excise tax rise is also favourable to GG whose products are mostly on machine-made cigarettes, or SKM (83% of total volume). The recent tax change (which became effective on 1 January 2011), increased tax on SKM by 4.8% and SKT (hand-rolled cigarettes) by 9%. Based on our survey, SKM is the most favoured type of cigarette, with Gudang Garam brands being the favourite outside Java.

3) ADARO ENERGY (ADRO): In-line weak -4% YoY 2010 Coal production – reit TRIM
iSay: Given short-term coal spot price weakness as Queensland floods easing and Target Price multiple downside risk to 15x (Rp2,400) from 18x currently (Rp2,900), on unattractive risk-reward, we continue to recommend TAKE PROFIT ADRO!

·         Fonny Surya (Daily attached): ADRO reported 4Q production of 10.36 mn tonnes, a 1.2% QoQ increase and ~15% YoY decrease. This resulted in 2010 production of 42.2 mn t, ~4% YoY, in line with our forecasts and revised guidance of 42-43 mn tonnes. Sales in 2010 reached 43.8 mn tonnes, ~4% increase YoY and 8.2% QoQ in 4Q10. We believe that ADRO has managed production relatively well. However, heavy rain has significantly increased demurrage costs and mildly impacted ASP given delayed shipments on higher priced coal.

·         We expect to still observe the lingering impacts of heavy rain in 1H11. Given ADRO’s share price has performed relatively well in the past three months, driven by coal prices and liquidity, we maintain our NEUTRAL rating and are revisiting our target price in the light of current market conditions.

4) XL-AXIATA (EXCL): In-line Revenue better margins FY2010 results - reit Buy!
iSay: We continue to like Top-3 Cellular Incumbents as beneficiary of industry consolidation and we donot believe a tariff war ala 2007-2008 in the cards. Therefore, we reiterate Buy EXCL (11.6x-10x 2011F-12F PER) together with ISAT (22x-13x 2011F-12F PER)!

·         Colin McCallum (Daily attached): Excelcom reported even stronger-than-expected 4Q10 results. Net cellular services revenue grew 4.8% QoQ and 17.7% YoY, driven by a 10% QoQ increase in SMS revenue and a 17% QoQ increase in data and other VAS revenue. Excelcom’s opex remained very well controlled into 4Q10, thus able to report a 5.6% QoQ and a 27.0% YoY EBITDA growth, and a 16.8% QoQ and an 88.3% YoY normalised net profit growth in 4Q10. Relative to our full-year forecast, Excelcom beat our FY10E net revenue, EBITDA and normalised net profit by 1.2%, 3.8% and 9.8%, respectively.

·         We believe Excelcom’s strong 4Q10 results support our argument that fears of a possible return to the 2007-08 price war and the risk of material decline in RPM and ARPU levels are overplayed. We are increasingly confident that Excelcom could achieve our FY11 forecasts. We maintain an OUTPERFORM.