Inflation 6.7%, China PMI, FY2010- GGRM in-line, PGAS below - Credit Suisse

1) ECONOMICS: March Inflation down 6.7% but Core Inflation up 4.5% - BI rate flat!
iSay: Robert’s macro forecasts are for GDP 6.0%-5.5%, Average CPI 7.5%-6.0%, therefore another 75bps increase and hence BI rate 7.50%-7.50% for 2011F-2012F respectively.
· Robert Prior-Wandesforde: March headline inflation move down (to 6.7% from 6.8%) and core inflation move up, although we had expected a bigger rise in the latter than the 4.4% to 4.5% increase that was reported. We are sticking with the view that Bank Indonesia will leave the policy rate unchanged for a second consecutive month when it next meets on 12 April.
· While the risks to our inflation projections (7.5% year average headline rate) are on the downside we continue to expect 75bps more of rate hikes by the end of the third quarter of this year. It is worth bearing in mind that even if BI were to match our rate expectations then Indonesia would probably deliver the smallest policy rate increase of any Asian country during the current tightening cycle. We expect the modest further policy tightening, which is unlikely to be passed on by commercial banks, to be triggered by the further move up in core inflation. The central bank has indicated that “it wouldn’t hesitate to act if the core rate breached 5%”. We would also note that the Indonesian economy will enjoy terms of trade benefits from higher oil and coal prices in contrast to most other Asian countries.

2) GEM STRATEGY: China PMI suggests soft landing – reit MarketWeight Indonesia!
iSay: Teddy Oetomo recently has lowered Indonesia Index Target to JCI 4,150pts at end-2011F (vs 4,400pts previously). Teddy’s Top-Buy stocks are BMRI, INDF, SMGR and BBNI, while Top-Sell stocks are KLBF and UNVR due to valuation mainly!
· Sakthi Siva (Report attached): The March reading for the China PMI (Purchasing Managers Index) rose from a low of 52.2 in February to 53.4 in March. The more forward-looking orders component rose to 55.2 in March (see Figures 2 and 3). While some of the rise could be seasonal, we believe the March reading suggests a soft landing, as readings remain comfortably above 50. But we are more excited by the fall in the PMI input prices from a high of 73.5 in November 2010 to 68.3 in March 2011.

3) GUDANG GARAM (GGRM): FY2010 Strong in-line results – remain Inflation hedge
iSay: Within Consumer Sector our Top-Buy stocks are GGRM, INDF and then ASII, while recommending Take Profit UNVR and KLBF on valuation. At Rp42,700/share, GGRM is trading on justified premium 16.3x-14.6x PER with EPS Growth 21%-12% for 2011F-2012F, and implying 24% UPSIDE to Target Price Rp53,000, we reiterate BUY GGRM!
· Ella Nusantoro (Daily attached): Gudang Garam reported FY10 net profit of Rp4.15 tr (+20% YoY), in line with our estimates and consensus. Its revenue rose 14% YoY to Rp37.7 tr, on the back of 5% volume growth YoY (67 bn sticks) and 9% higher ASP YoY. Gross profit soared 24% YoY and margin expanded to 23.5% from 21.7% in FY09. With rising promotion cost, operating profit only rose 13% YoY, hence margin declined marginally to 15.5%. In 4Q10, revenue rose 7% QoQ (+8% YoY) to Rp10 tr, with gross margin stable at 24.4%. Opex rose 41% QoQ (+35% YoY) due to rising wages (2.5% of revenue), hence operating profit was down 6% QoQ (+24% YoY) and margin declined to 15.9%, from 18.1% in 3Q10. Net profit was Rp1.1 tr in 4Q10 (-8% QoQ, +16% YoY). We maintain our OUTPERFORM rating on the stock with Rp53,000 as a target price, implying 20.2x P/E 2011E with 16% estimated earnings growth over the next two years.

4) PERUSAHAAN GAS (PGAS) Report: FY2010 in-line Operating results, EPS below!
iSay: PGAS is lacking of short-term catalysts while LNG profitability remains key for mid-term growth outlook. Fonny is assuming Risk-Free rate 8.5%, therefore DCF Rp4,700 at end-2011F with LNG Distribution Margin USD1.8/mmbtu starting 2013F. At Rp3,900- PGAS is trading on 12.9x-12.4x PER with EPS Growth 17%-5%, 4.0%-4.6% Dividend Yield for 2011F-12F, and implying 20% UPSIDE to DCF Rp4,700 (implying 15.6x 2011F PER). Buy PGAS as a laggard but strong cash-flow Utility play which deserves to trade in-line with market (please note, Teddy Oetomo’s JCI Target is 4,150pts end-2011F based on 16x 2011F PER)!
· Fonny Surya (Report attached): PGAS’ FY10 net profit of Rp6,239 bn, flat YoY. The earnings were approximately 5% below our estimate and 7% below consensus. FY10 net profit ex. forex and derivatives losses, however, increased 36.2% YoY to Rp7,170 bn – approximately 12% above our forecast due to a lower tax rate. FY10 revenue rose 9.7% YoY, driven by increase in ASP of 11% YoY and distribution volume of 4% YoY. EBITDA margin improved to 54% from 52% in 2009.
· We still expect a decent 11% increase in EPS for 2011, given the full impact of price increase. We expect relatively flat earnings in 2012, given limited supply and little possibility of gas price increase. Despite our expectation for minimal growth in the near term, we see a potential recovery of volume from Conoco – by ~80 mmscfd (9% of total volume) – if Jambi Merang gas runs on schedule by 2Q11, which may serve as a potential catalyst. We revise down our tax rate assumption to 22.5%, resulting in a slight increase in our 2012 earnings estimate.
· We believe market’s concerns about supply and limited growth in the near term have mostly been priced in. We see limited downside risk to the current share price, and potential upside from Conoco volume recovery could prompt a rerating of the stock. We maintain our OUTPERFORM rating and target price of Rp4,700.