Morgan Stanley BNBR Stock Rating to Underweight With a New TP of Rp50/share

We are downgrading Bakrie and Brothers (BNBR) stock rating to Underweight with a new target price of Rp50/share. Over the next six to 12 months, BNBR, in our view, will likely continue to be preoccupied with minimizing its solvency and liquidity risks, which puts a halt on the company’s aggressive expansion plans. The combination of high financial risks, weak earnings outlook and uncertain management execution, in our opinion, will continue to weigh on BNBR stock price.

Near-term overhangs: liquidity, solvency, capital raising, and earnings dilution: Despite the completion of the BNBR debt restructuring in December 2008, we remain cautious on the company’s ability to meet Rp823bn of ST debt obligations, given a tight cash balance of only Rp240bn at the end of September 2008. In addition to this hurdle, BNBR is planning to issue Rp4.3tr worth of convertible bonds – pending shareholder approval – exercisable in May 2009 at Rp100-110 per share.Artificial floor price for BNBR stock price? Due to the IDX ruling on the minimum price for regular market transactions at Rp50/share, BNBR shares, which are trading at
the aforesaid threshold level, could appear to be defensive.

Risks to our call:
1) Sharp appreciation in commodity prices;
2) convincing rebound in the global economy;
3) accelerating inflow of credit into the Indonesian economy;
4) successful capital raising exercises; and
5) recovering perception on BNBR’s management execution ability.