Equity Strategy
FY25 Outlook: Attractive valuation emerges as headwind and soft growth outlook are priced in
- Despite external headwinds on Rupiah and liquidity, we believe JCI valuation has currently priced in a soft growth outlook for FY25.
- Amid resilient economic growth outlook, we forecast FY25 EPS growth of 6.5%, which also transpires into improving market ROE to 19.6%.
- We foresee JCI target of 7,850 based on 13x PE; our preferred picks are defensive sectors (i.e, Consumers, Telco) and Rupiah hedge (UNTR).
JCI valuation has priced in negative growth scenario
Post the sell-off in Dec24, JCI’s current valuation of 12.7x forward P/E (7.9% earnings yield) implies a 77bps spread over the 10-year bond yield (vs. 3year average spread of 71bps, and highest spread of 233bps). Furthermore, assuming a market P/E of 13x (around -1SD of 5-year mean), the current JCI P/E is pricing in EPS growth of c.2%, which we think is unwarranted.
Theme #1: Steady growth with potential tailwind from new govt initiatives
Our base-case FY25 growth outlook is anchored on GDP growth forecast of 5.0-5.2%. We believe Indonesia’s resilient GDP growth is potentially driven by support from the spending and initiatives from the govt (potentially totaling to Rp121tr), though the impacts are expected to be more pronounced in 2H25. We believe there is also support for consumers’ purchasing power if the strength in CPO prices (YTD avg of MYR4,199/t vs. FY23: MYR3,812/t) is sustained, given the historical correlation with consumer spending.
Theme #2: Improving ROE, driven by improved margin; peaking capex
We estimate that the market’s overall ROE will improve to 19.6% in FY25 (vs. 18.9% in FY24) with some key sectors to see ROE improvements in FY25 namely Consumers (to 51.9% from 49% in FY24), Telco (to 16.7% from 16.2%), Healthcare (to 16.6% from 15.7%). We expect the ROE improvement to be driven by better margin, peaking capex, efficiency and industry consolidation.
Theme #3: The rise of conglomeration
Based on our observation on the nine business groups, we observed growth in market capitalization by 196% in FY22-24 to US$277bn, accounting for 36% of total JCI capitalization (vs. 15% in FY22 vs. 30-69% in ASEAN and 52% in Indian markets. In our view, this may offer better access to financing and pave way for more M&A activities in the market.
Risks: Growth muddle-through, IDR and Liquidity
Key risk to our main theme is the scenario of muddle-through economic growth, similar to in FY24, amid still weak consumers’ confidence across all segments in Oct24 and falling savings rate in the low-end segment. Amid Rupiah volatility, due to external risks, we also noted persisting tight domestic liquidity to that could particularly impact banks’ profitability in FY25.
Our FY25-end JCI target and picks
We arrive at our base case FY25 year-end target of 7,850, taking into consideration our FY25/26 EPS growth forecast of 6.5/10% and PE target of 13x, with bull/ bear case of 8,060/ 7,030. Our preferred pick for 1H25 are the: 1) Consumer sector; 2) ‘Quality’ stocks, with better ROE and visible earnings improvement 3) Hedge against USD. Thus, we reiterate our preference on the following names: ICBP (Buy, TP Rp14,000), HEAL (Buy, TP Rp2,000), ISAT (Buy, TP Rp3,800), BBCA (Buy, TP Rp12,800), JPFA (Buy, TP Rp2,800), UNTR (Buy, TP Rp31,000).
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