CLSA Bank Danamon (BDMN IJ) acquisition of 20% stake in Adira (ADMF IJ) – Expensive

Danamon to acquire additinal 20% stake in Adira Finance for Rp1.61tn

· The purchase price implies 4.1x 08 PBV and 7.9x 08 PE.
· In nominal terms, Danamon purchased 75% stake of Adira previously for Rp850bn in 2004 vs. current 20% stake for Rp1.61tn.
· Shareholder approval will be required as this is considered a material transaction and shareholder meeting will be held on 25 May 2009.

Comment: This is an expensive acquisition given (1) previous 75% stake of Adira was acquired at lower valuation of 3.4x 03 PBV back in Jan 04 (2) recent comparable transaction (Mandiri's acquisition of Tunas Finance) at only 2.3x PBV and (3) derating of banking sector valuation since last year. One can argue that Adira's high ROE (64% as of Dec 08) can justify the high PBV multiple, but it is also worth noting that Adira's underlying profitability is much lower given most of the provisioning and funding are provided by Danamon. We estimate the capital charge for this acquisition at 230bp, which will bring down Danamon's CAR to about 18% post rights issue. This latest acquisition also supports our view that Danamon should generate sub-par ROE for this year. At Rp2625/share, Danamon currently trades 1.4x 09CL PBV. Maintain Sell with target of Rp1700/share or 0.9x PBV.