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2017 Will Be Steady Year for Indonesian Firms: Moody's

BY :DION BISARA

DECEMBER 14, 2016

Jakarta. Moody's Investors Services projects steady earnings growth for Indonesian corporations next year on the back of accelerating economic expansion, validating the debt rating agency's stable outlook on most of the companies' bonds.

Moody's expects the Indonesian economy to expand 5.2 percent from an estimated 5 percent growth rate this year, which would support corporate earnings growth of between 2 percent and 6 percent, it wrote in a report published on Wednesday (14/12).

"[H]igher commodity prices will benefit the oil and gas, palm oil and coal sectors, while state-owned entities will help the government fund and execute large infrastructure projects," Moody's said in the report.

Of the 41 Indonesian companies Moody's covered, 22, mostly banks and financial institutions, are rated as investment grade while the remainder remain at junk levels. In comparison, Moody's placed Indonesia's sovereign bonds at Baa3 – the lowest investment grade notch given by the agency – with a stable outlook.

Among the companies, 32 have a stable outlook on their debt ratings. A stable outlook means the company bonds rating may stay at current level in the medium term. Three companies have positive outlook and only five have negative outlook with one company's rating being under review.

State energy company Pertamina's bond is rated at Baa3 with stable outlook. Smaller rival Energi Mega Persada, a company controlled by the family of tycoon and politician Aburizal Bakrie, is rated with highly speculative rating of B2, also with stable outlook.

"[S]tronger-than-expected upstream earnings from oil-price gains will encourage oil and gas capital investments and acquisitions within the sector," the agency said.

"Priority infrastructure projects and the 35,000-megawatt power plant program will drive demand in the construction, building materials and heavy equipment sectors," Moody's said.

State-controlled cement maker Semen Indonesia, state-owned gas distributor Perusahaan Gas Negara and heavy equipment distributors United Tractors are among companies placed at investment grade of Baa3, all with stable outlooks.

In the property sector, Moody's says one-off transactions would likely become the main drive for revenue, but core "marketing sales are likely to remain weak."

The agency rates Lippo Karawaci, Indonesia's largest property company, at Ba3 or three notches below investment grade with a negative outlook. Rival Alam Sutra Realty is at even lower speculative level of B2 with a stable outlook. Risk-averse investors may be better off investing in Lippo Malls Indonesia Retail Trust, a real estate investment trust that has an investment grade and a stable outlook.

Moody's expects consumer spending to rebound next year, supporting sales of property, automobiles, motorcycles, white goods and consumer electronics companies. "Upside potential is dependent on the stability of the rupiah and level of tax amnesty repatriation," the agency wrote, referring to a government program that forgives back taxes on Indonesian taxpayer's hidden assets.

Telecommunication companies could also expect a relatively stable business environment, with data revenue driving growth, Moody's wrote.

State-controlled Telekomunikasi Indonesia and its unit Telekomunikasi Selular are both placed at Baa1 – higher than Indonesia's sovereign bonds – with stable outlook.

Smaller rivals XL Axiata's and Indosat's debts are only one notch below investment grade but their performance has a chance of improving over the medium term, Moody's said.

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