07/15/2015
Indonesia / Consumer Goods
This year’s Lebaran season in Indonesia is unable to spur consumer spending as it usually does. We expect this to weigh on the consumer and retail sector’s June quarter results.
We expect stocks in Indonesia’s consumer and retail sector to report disappointing June quarter results as consumption remains weak, and the fundamentals have not improved substantially for us to believe otherwise. March quarter results were largely supported by an increase in average selling prices, which will not be the case in the June quarter as sellers would not be able to raise prices amid already slowing demand.
The Lebaran season normally spurs consumer spending compared to other periods in the year, but it is not having a strong impact this year. Hence, we expect June quarter results to show weaker sales year-on-year. The positive impact of low commodity prices would also be partly negated by the weak Indonesian rupiah, suggesting minimal margin expansion. We expect downward revision to earnings post-June quarter results.
Checks revealed that consumer sentiment is indeed weak. Business owners are sceptical and pessimistic about business prospects, citing the weakest Lebaran sales in the past 2-3 years. Sales have dropped 20-30% on-year for some businesses as consumers became pickier and competition intensified. Rising food and energy costs also continue to deter consumer spending, especially on discretionary items.
In view of the above, we recommend sticking to consumer staple names for now as retailers are more likely to be hurt by slowing demand for discretionary items. Unilever Indonesia is overpriced at the current levels amid slowing earnings growth. We have a BUY call on Indofood Sukses Makmur for its attractive valuation discount and exposure to Indofood CBP Sukses Makmur.
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