Indonesia is one of the world's largest countries. The country is the world's 4th most populated with over 238 million people. Most of the population is centered on a few major islands, the most prominent being Java which has the 2 largest cities (Jakarta and Surabaya).
The country's economy, like many other emerging markets, has been growing rapidly in the past decade. In this article I will highlight a couple of easy ways that U.S.-based investors can invest in the country, looking at both ETFs as well as a few individual companies. I won't spend time discussing the Indonesian growth prospects or risks in detail - a recent SA article has some good examples to describe this already.
Indonesian Companies Trading on US Markets
There are not many individual companies which trade ADRs on U.S. exchanges. A few potentially attractive ones are highlighted below.
One Year Return
Indofood Sukses Makmur Tbk PT
One of my favorites is IndoFood Indofood Sukses Makmur Tbk PT (INDFY.PK). This company is a large maker of noodles, flour, snacks, milk, and other consumer food products.
I first came in contact with IndoFood through personal experience. My wife is actually Indonesian, and I was introduced a number of years ago to "Indo Mie" instant noodles. They were quite simply the best instant noodles that I had ever tasted. There are many different varieties as well, some more popular than others depending on the consumer market. The company actually is the largest producer of instant noodles in the world, and exports them to several countries including the U.S., Australia, European Union, and countries in Africa and the Middle East.
Unfortunately however, the INDFY ADR seems to be very thinly traded, so it doesn't appear to be accessible for investors in practice. The best way to get exposure to it therefore is via one of the two ETFs mentioned later in the article.
As for the telecom companies, I think both have good potential as investments at the right entry price. P.T. Telkom (TLK) is by far the largest and most accessible for U.S. investors, as 187k shares are traded daily on average. P.T. Indosat (IIT) only has an average daily volume of 2k shares, and could be difficult to trade for larger investors. Therefore I've decided to take a little bit closer look at TLK, and below in the table I've done a short analysis of the major points of the company.
Note that the criteria I've evaluated TLK against come from the normal 10 point system that I use to evaluate companies. If you happened to read any of my focus articles on SA, an example here, you may have seen me use this before. I won't follow that system in detail here, as I have not got into that much depth for TLK, but if you want more information on this please read my philosophy on my website.
|Good Business Prospects||With Indonesian GDP growing at 6% a year the last several years, investments in infrastructure including telecom continue to be very good. Mobile usage and internet data continues to expand.|
|Competitive Moat||The company is far in a way the largest in Indonesia for telecom. It also has impressive margins, with net profit margin around 23% compared to an industry average of only 7%. Clearly the company has some competitive advantages due to economies of scale and pricing power.|
|Conservatively Financed||Total Debt/Equity is 0.31. Current Ratio is low, only 0.80.|
There is a dividend yield of 2.80%. However the dividend was lowered from 1.60/share to only 1.10 recently. This requires deeper investigation.
|Valuation (Margin of Safety)||Only one analyst covers the stock, and has a 5 year EPS growth estimate of 8.70%. If we are more conservative and assume only 5% over 10 years, use a discount rate of 6%, and a confidence margin of 75%, The intrinsic value is $45.12/share. With current price at $39.71, there is a margin of safety of about 20%.|
|Predictable Earnings||EPS growth has been nearly flat or even negative over the past 10 years. Earnings are remarkably stable, albeit unspectacular. Seems to be a very low risk play, with earnings even stable during the great recession. Higher growth rates are expected in the coming few years.|
In summary, TLK is a stable slow growing company with a decent dividend. I would want to take a further look as to why the company has cut the dividend, and what the outlook is there in the coming years, because right now that is the main plus to the stock as it is definitely not a fast grower. Also looking at the current valuation and margin of safety, I would be a bit hesitant to buy in right now - I would wait for a dip in price. If the shares trade down into the lower 30s for example I think it would be a much more interesting play.
Overview of US Traded Indonesia ETFs
So having taken a quick look at a few of the individual companies trading in U.S. markets, none of them are unfortunately fantastic investments now.
I believe for most U.S.-based investors, including myself, the ETFs would be the more practical and less risky way to invest in Indonesia at the present time. The table below shows the ETFs which are available for Indonesia.
Market Vectors Indonesia Index ETF
MSCI Indonesia Investable Market Index Fund
Market Vectors Indonesia Small-Cap ETF
Table Sourced from here.
As of August 31, 2012
The iShares MSCI EIDO ETF has remarkably similar sector weightings.
Personally I have owned IDX in the past, but I think either is a fine choice. They both have major exposure to the financials, consumer sectors, and telecommunications which have strong growth prospects. This includes the major (and more stable) companies, including the three mentioned above. The expense ratios are low (~0.60%) and there is a modest dividend around 1.2%. Both funds are quite liquid as well, so no problems buying and selling for average investors.
In conclusion there are clearly several good opportunities via ETFs that the U.S. investor can seize to get a slice of the Indonesian market. I recommend you take the chance while it's still there and valuations remain at reasonable levels. The Indonesian market has only risen modestly the last few years - in 2012 these ETFs are only up about 3%, well behind the U.S. markets. However this is after a large run-up in price a few years ago. With continued strong growth in the country, I believe the Indonesian market is poised to resume its upward march again in 2013, and now is as good a time as any to buy in.