Aberdeen Sees Consumer Boom in Indonesian Roads: Southeast Asia

Jul 14, 2014 6:47 am ET

July 14 (Bloomberg) -- A two-hour drive from Jakarta, near a tea plantation developed by the Dutch, 48-year-old Atmi makes about $250 a month selling snacks from her wooden shop. If the road outside got fixed, she’d be earning more.

The shattered asphalt leading to her store hasn’t been repaved in years, an example of the dilapidated Indonesian infrastructure that’s holding back sales everywhere from the smallest shopkeepers to consumer giants such as PT Unilever Indonesia and PT Indofood Sukses Makmur.

That may be about to end.

Both candidates in Indonesia’s disputed presidential election are pledging to spend big on roads, ports and railways, a move that would ease retailers’ struggle to reach customers in remote parts of the island nation. While consumer companies in the world’s fourth most-populous country trailed builders as the benchmark stock index rose 18 percent this year, the Indonesia Food & Beverage Producers Association says sales would be as much as 50 percent higher with improved access to rural areas.

“We see consumer companies in Indonesia as another way of playing the infrastructure cycle indirectly,” Mark Gordon- James, a senior investment manager at Aberdeen Asset Management, which oversees about $541 billion, said in an interview in Singapore on July 10. “Any pro-infrastructure policy will in turn make the economy more competitive and those benefits will trickle down to the consumer.”

Indonesia, where the economy is projected to grow 5.7 percent a year through 2016, will gain about 80 million new consumers in the next 15 years, says Kantar Worldpanel, a London-based research firm.

Roads, Ports

Joko Widodo, Jakarta’s governor, has a lead of 2 to 6 percentage points based on initial tallies after the July 9 vote, with official results due by July 22. His opponent Prabowo Subianto said quick counts done by companies he used for guidance showed him in the lead.

While the politicians differ in their views on government debt and spending, they both agree on the need for better infrastructure. Widodo says he wants to build 2,000 kilometers (1,244 miles) of new roads and 10 seaports. Prabowo pledged to spend about $121 billion in five years to construct 3,000 kilometers of roads and 4,000 kilometers of railways, along with airports and seaports.

“Infrastructure is very poor in Indonesia, so it’s very costly for us to reach remote areas,” said Adhi Lukman, chairman of the Jakarta-based Indonesia Food & Beverage Producers Association, which counts Unilever Indonesia and PT Coca Cola Indonesia among its 381 members. “If we fix these problems, the industry could see an increase of 40 to 50 percent in volume.”

Valuation Concerns

Projections that a Widodo victory would cut red tape and corruption helped send the Jakarta Composite Index into a bull market in March.

Infrastructure developers and construction firms led the advance since Widodo was named the presidential contender for Indonesia’s Democratic Party of Struggle. The Jakarta Infrastructure, Utility & Transportation Index jumped about 10 percent since his nomination on March 14, while the Construction, Property & Real Estate gauge added 1.6 percent. The Consumer Goods Index was little changed.

The consumer measure declined 0.4 percent today, while the Jakarta Composite dropped 0.2 percent.

Most Expensive

Any further gains in consumer stocks will be limited because the shares are too expensive after advancing for five straight years, says Farash Farich, a fund manager at Jakarta- based PT AAA Asset Management, which oversees around $470 million. The consumer gauge is valued at about 24 times projected earnings for the next 12 months, a 34 percent premium over the infrastructure index.

Unilever Indonesia trades at 37 times forecast profits, making it the world’s most expensive producer of consumer staples with a market capitalization of at least $10 billion, according to data compiled by Bloomberg.

“I don’t expect consumer stocks to have strong growth ahead,” Farich said. “Looking at their valuation right now, it seems the share price would only track earnings growth.”

For PT Ashmore Asset Management Indonesia, the long-term potential of consumer companies justifies their cost. Earnings in the consumer index will probably increase more than 15 percent annually for the next two years, according to analyst estimates compiled by Bloomberg.

Transport Costs

“Consumer stocks have never been cheap, but for us this is a long-term investment,” said Arief Wana, a director at Ashmore, which oversees the equivalent of about $423 million of Indonesian assets. “Infrastructure companies might benefit from projects over the next two or three years, and then consumer stocks can follow.”

Household consumption of staple products in the 77,548 villages scattered throughout the archipelago can be as much as 60 percent lower than in towns and cities, according to Kantar.

Neglected infrastructure has swollen logistics costs to about 27 percent of gross domestic product, the highest in Southeast Asia, according to a July 8 report by PT Indo Premier Securities, citing data from the World Bank and Indonesia Port Corporation. It costs companies about $650 to send a container from Jakarta to Indonesia’s Batam island, nearly three times the price of an equivalent shipment to Singapore, which is only about 20 kilometers further north, according to Lukman.

“Both candidates, and even the current president, have been saying that they want to build infrastructure,” Franciscus Welirang, a director at PT Indofood Sukses Makmur, said by phone on July 2. “Infrastructure improvements would automatically boost the economy, lower distribution costs and speed up rural development.”

For Atmi, who like many Indonesians uses only one name, a freshly paved road isn’t just about luring more customers to her store. It’d also cut her fuel costs when she makes a 25- kilometer trip to refresh supplies every week.

“I hope my business can grow and improve when the new government comes in,” she said.

--With assistance from Weiyi Lim in Singapore.