Indonesian Consumer is ‘Very Cool’

In a light of recent inflation data, I feel that Indonesia is cool once again. Hopefully this note can be another reminder.

Early this week, Sucor’s Economist Mike said that we “recorded a lower than expected inflation… of 4% YoY in May”. This is surprising because we have not seen this happening anywhere else.

My first-hand experience, for instance – as I came back from Japan during holiday, a place where inflation was non-existent for years, rail-pass was drastically increased last April which upsetting a lot of tourists and locals.

JRailPass quote a whopping 77% increase! A good friend living in Tokyo in advertising agency mentioned “it becomes harder to be rich in Japan,” if living costs stood in a stark contrast with stagnant wages. First and foremost, this is coming from a managerial level of multinational business.

You might question if it only train rides in Japan and a comment from salary man, why should you care? The callous answer is inflation in western economies (say, Japan included) is canary in coal mine for consumers fall out.

Taking a step back, also last week, amusing observation was seen in US stock market.

Shares of Dollar General fell after Q1 with one bank called it “surprisingly poor & weaker-than-expected” result. Immediately the company slashed its full-year sales and profit forecast.

Again, this context poses a question on why should we care about the stock of a discount store? It is because US market – as we know – is (arguably) in a bull market.

But if we take Dollar General at its word, the key issue is the macro environment and the impact of it has on the “core customer”. Notwithstanding blaming macro for everyday finance reasons, coming from The Dollar General CEO, it is something.

At the risk of accidentally offending anybody, “core customer” in this context means people with very little money.

On the infamous call, CEO Jeff Owen said the excerpt below. I shorten it out to serve only the highlight of the call:

“Overall, we had a softer than expected sales in the quarter… which we believe was primarily driven by a deterioration of macroeconomic environment, including headwinds of lower tax refunds and reduction in SNAP benefits…”

Then comes the important part: “we have seen an impact on sales, as our customer have reduced the size of basket instead of using other forms of tender to complete purchase at the same level… additionally, these and other customer appear to be shopping closer to payday.”

If you are unfamiliar with SNAP, long story short, it changes to benefits enacted during the pandemic lapsed, and obviously impacting families relying on larger allotments.

The market wasn’t enamoured with Dollar General report. That is an understatement – in case you missed it. The stock suffered the largest single session decline in history: falling nearly 20%.

One reason to care about all of these, is that juxtaposition between Dollar General and US tech is massive.

The later spirals higher on A.I optimism, turbocharged by notion that FOMC is one hike away from terminal at most.

As a result, US looks like having a bull market.

Nvidia up 200% in 2023 alone. Dollar general down more than 30%.

I would call this the manifestation: The Zeitgeist of 2023: Low-income humans vs high-end robots.

Although it is sad to hear the satire notion, the Fed who countenances another equity bubble is pretty much unavoidable for consumers.

Will we see another animal spirit ignites wealth effect once again? The answer is most probably yes. But higher equities could keep inflation “higher for longer”, so to speak.

I understand that taking things by the face value might proof bias to you readers. Comparing Dollar General and Nvidia is apple to oranges. Yet it is a fun perspective.

Although it is not as “fun” to see the deterioration of Main Street, as seen how everything else in the US under-the-hood has been quite messy. Only top 1% of US stock has grown. Not so much for everything else.

Pardon me for the long explanation of US market, but it is important to see how it evolves in stark contrast with our market.

I believe any countries’ economy must rely on strong consumer base and a well distributed wealth effect for a stable growth trajectory, and better social prosperity. We hardly need PhD to know an inequality gap explosion versus low-end consumer might trigger stagflation at worst.

When the western economies consumer struggle with financial strain, Indonesian consumers have been showing signs of encouragement.

I believe clients who went for retail and consumer stocks early this year have been tremendously benefited with share price that went ahead its careful guidance. I believe, modest inflation is something we have to be very thankful for from macro view, a result of encouraging trade balance and stable rupiah.

For more story on why I believe that rupiah fundamental is improving, you can read my previous post on Latte Inflation.

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Consumer and Retail Stocks are getting more traction

Recalling, around 2010-2015 Indonesian stock market believed that middle income driven economy was a going to be a key thesis. Although we faced some hiccups during the cycle – falling CPO prices, coal and prospect of Yellen’s reversal – we feel that Indonesia is a different animal when it comes to 2023 onwards as rupiah is among best performing currency in the last one year comparing to its fundamental a decade ago.

Another apple-to-oranges chart to play with, take one retail stock trades at mid-teens price earning multiple is currently champion of market, versus Indonesian largest tech. It is a perspective to look at on how Indonesia ‘cool’ retail business has been attracting LOs hearing from the client feedbacks.

My point is Indonesian consumer is healthy and benign. This makes it hard to overlook retail and consumer stocks which strong cash-flow has been the primary beauty in a light of recent set up.

Normally, I will throw you some stats from macro perspective. But this time, hearing directly from our analyst comments on each company might prove more useful to you, readers.

This consumer segment is coming from Clara Nathania who handles the sector:

ROTI

FY23 sales (our estimate): IDR4.4 tn (+12.3% yoy)

FY22 sales: IDR3.9 tn (+19.7% yoy)

1Q23 sales: IDR941 bn (+3.5% yoy/-12.3% qoq)

We like ROTI for its robust growth outlook as we view sales has room to further grow with ROTI's massive expansion in recent years. As of 1Q23, ROTI's MT point of sales has reached 42,500 outlets (+25% from 2019). Overall foot-traffic in MT outlets is gradually increasing as consumers are more confident to engage in daily activities. Additionally, the declining raw material prices will also help boost margins this year.

ICBP

Company guidance FY23 sales: IDR71.3 - 72.6 tn (+10-12% yoy)

FY23 sales (our forecast ): IDR71.8 tn (+10.8% yoy)

FY22 sales: IDR64.8 tn (+14.1% yoy)

1Q23 sales: IDR19.1 tn (+11.4% yoy/+12.2% qoq)

We like ICBP for its strong earnings growth, coupled with higher profitability margins following the higher volume (purchasing power recovery from declining inflation and modest wage growth, coupled with higher consumption prior the election year) and reduction in input costs.

MYOR

FY23 sales (our number): IDR34.5 tn (+12.6% yoy)

FY22 sales: IDR30.7 tn (+9.9% yoy)

1Q23 sales: IDR8.5 tn (+11.4% yoy/+0.2% qoq)

MYOR has solid earnings supported by stronger sales volume (both in domestic and export markets) and potential benefit from the middle-class’ purchasing power.

... and Benyamin Mikael who handles retail stocks:

ACES

Guidance 2023 FY sales: 8-10% growth

2022 FY sales: IDR6.7 tn (+3.4% yoy)

1Q23 sales : IDR 1.7 tn (+4.7% yoy)

Store growth FY23 target: 4.4 -6.6% of total store in FY22

(+) Demand on durable goods started to pick up

( - ) Limited room to efficiency in 2023 (many efficiency have been done in 2020-22) and potential reversal of gain from post employment benefit into post employment benefit expense

MAPI

Guidance 2023 FY sales: 20% growth

2022 FY sales: IDR 26.9 tn (+46.2% yoy)

1Q23 sales : IDR 7.46 tn (+32.5% yoy)

Space growth FY23 target: 600- 700 gross store (22.5-26.3% of total store in FY22)

(+) Solid demand from middle up segment and aggressive store expansion

( - ) Higher rental cost limit the net profit growth

MAPA

Guidance 2023 FY sales: 20% growth

2022 FY sales: IDR9.8 tn (+62.2% yoy)

1Q23 sales : IDR2.7 tn (+42% yoy)

Space growth FY23 target: 10% growth

(+) Solid demand from middle up segment and aggressive store expansion

( - ) Higher rental cost limit the net profit growth

ERAA

Guidance 2023 FY sales:

2022 FY sales: IDR49.4 tn

1Q23 sales: IDR14.8 tn (+28.9% yoy)

Space growth FY23 target: <400 gross store (+23.7% yoy)

(+) Attempt to expand the market share

( - ) Weak smartphone demand & aggressive store expansion may need more time to translate into a positive performance

AMRT

Guidance 2023 FY sales: 10% yoy

2022 FY sales: IDR96.9 tn (+14.2% yoy)

1Q23 sales: 26.1 tn (+14.2% yoy)

Store growth FY23 target: 1000 gross alfamart store only (+5.6% yoy)

(+) Normalization of inflation which translated into higher purchasing power and continuation of the growth

( - ) Earnings growth may not stronger than the previous years on the high base growth

Cheers!

Boris, the Stock Broker 🐾

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