Inflation and trade improvements: Are they here to stay?

The central bureau of statistics (BPS) announced Apr13 inflation and Mar13 trade results yesterday.  As in April 2013 Consumer Price Index Indonesia inflation and March 2013 Trade Preview in The Indonesia Market Summaries, that the consumer price index deflated 0.10% mom in Apr13, pulling down the year-on-year inflation to 5.57% yoy from 5.89% yoy in Mar13 (vs. consensus’ 5.67% yoy and our 5.53% yoy). Two major components namely raw food and clothing were the main deflators.  The year- to- date inflation is 2.24%.

Core inflation eased (again). It continued to slow down to 4.12% yoy in Apr13 from 4.21% yoy in the previous month. Moreover, this trend has been prevailing since the last five months. We believe the deceleration of gold price is the reason for slower core reading. We think, however, it is not the only reason. Even if we exclude gold price impact from the core calculation, the on-year core inflation remains relatively benign this year.

Is the pass-through impact of administered price hike to core inflation has not yet been seen or easing core inflation (excluding gold effect) is a sign of demand slowdown? We believe the answer relies on a combination of factors. First factor, we think, part of the pass- through impact of administered price hike to core inflation has actually materialized yet not entirely. Indirect impact of minimum wage increase has affected higher informal workers (maid and household workers) whose wages average is below the minimum.

However, no big concern on demand slowdown as we think part of it is due to the macro policies implementation. We think macro policies to fix external imbalance have caused slower consumer demand. For instance, BI’s loan to value policy has reduced demand for motor vehicles, reflected by easing sale of cars so far this year. Furthermore, BI’s liquidity tightening has resulted in lower money supply growth, which in the end leads to moderation in credit growth.

Beware of potential inflation “overhang.” Moreover, we see inflation expectation pressure will pick up ahead. The fact that the president decided to hike subsidized fuel price only if the cash transfer program is approved by the parliament in the next budget meeting (likely in Jun13) creates a new uncertainty. Thus, regardless of what will happen on subsidized fuel price policy, the period between now until the decision of fuel price hike will likely generate an inflation “overhang” condition.

Meanwhile the central statistic agency also announced Mar13 trade data which came out stronger than expected, yet unfortunately for the wrong reasons. Trade balance has swing to a surplus of US$0.31bn from deficit US$0.33bn in Feb13, owing to larger contraction on imports than in exports. Exports slightly decreased 0.08% mom in Mar13 mainly due to shrinking CPO export followed by electrical devices, tins and nickel. Meanwhile, imports contracted by 4% mom. Specifically, non-oil and gas import.

Policy implications:  BI rate is expected to remain unchanged in the next board meeting (14/5), reflecting BI’s accommodative stance while the central bank will likely absorb more liquidity with monetary instruments to tame inflation expectation pressure. Tame inflationary pressure will provide ground for BI not to aggressively hike interest rate amid possible increase in fuel price in the beginning of 2H13. Specifically, we expect the BI and FASBI rates to be unchanged at 5.75% and 4%, respectively.

Erajaya Swasembada 1Q13 came weak

Erajaya Swasembada: As expected, 1Q13 came weak (ERAA, Buy, Rp3,175, TP: Rp3,875)

1Q13 NPAT came at Rp75bn, forming 12% of our and consensus’ full-year estimates. This is not really a surprise, as management has earlier been guiding for weak 1Q13, as:

• flood affected its central distribution in Jakarta,
• absent of key products launching affected its volume
• changes in import regulation affected some importation activities in the beginning of this year (which also led to doubling interest expenses as ERAA stocked up more inventories).

In 1Q12, NPAT was 18% of the full-year.

Sales still in-line if not for the 2-weeks flood disruption. On a YoY basis, 1Q13 NPAT fell 5.3%yoy as sales declined 7.5%yoy to Rp2,935bn. Weak sales (17% of us and consensus) came on the back of the Jakarta flood that disrupted ERAA’s central distribution in Jakarta for about two weeks long, affecting sub-distribution across cities. Had there been no flood, we estimate that ERAA”s sales would have been Rp3,522bn, an increase of 11%yoy and 9%qoq, still in-line with 20-21% realization to our and consensus’ full-year forecast.

Stores opening seasonality affected weak 1Q13. Seasonality in the retail stores opening also contributed to the weak 1Q13 sales. Out of the targeted 105 net stores opening (including stores closures), ERAA only realized a total net opening of 2 stores in 1Q13. The company keeps its opening target unchanged, expecting the roll-out to ramp up in 2Q13 onwards.

Expect a strong rebound 2Q13. We still expect a strong rebound in 2Q13, on account of a) sharp reduction in BB grey market handset (from 30% to 5% post new import ruling) that should benefit ERAA, b) strong new products pipeline (BB Z10, Samsung Galaxy S4, and BBQ10), b) normalized distribution and inventory after flood issues and new import ruling, and c) better stores opening seasonality. Beyond 2Q13, we think that the key catalyst would be the potential launching of BB R10, the mid-end segment for BB10.

Indonesia Market Summaries, 2 May 2013.