UBS Investment Research - Pricing of 20% Adira Acquisition

Danamon to spend Rp1.4tn or Rp7135/share for 20% Adira Finance stake
Danamon prospectus just published said it will pay Rp1417bn cash to Adira’s founders, to increase its stake in Adira Finance to 95% from 75%. We support this
acquisition as it secures the support of Adira founders for the next four years and it looks fairly valued given current bond yields. The price tag implied 6.7x 2008A PER and compared to Rp3,200 Adira market price. An EGM will be held on 25 May for this material acquisition. A simple majority approval is required.

Fairly valued acquisition in our estimate
Assuming net profit of Rp1.05tn in 2010E for Adira, spending Rp1.4tn cash for 20% stake would generate an additional earnings amounting to Rp210bn pregoodwill amortization or Rp138bn post good-will. The money would have generated Rp119bn net after tax interest income invested at 12% 10yr gov’t bond yield. The small positive Rp19bn difference is why we see this acquisition as fairly valued.

Although it is 27% higher than we originally assumed
On 24 February 2009, we predicted Rp1.1tn price tag for the acquisiton. The increase is supported by a) Adira Q1 09 earnings of Rp294bn - already 15% higher than 2008 average on better than expected NIM and credit cost despite tough environment, b) Danamon PER rerating to 9.4x 2010E from 8.0x and c) the 10yr government bond yield declining to 12% from 13% during the period.

Valuation: Reiterate Neutral, our preferred bank
We derive our price target using Gordon Growth model, assuming 12.8% risk free rate, 20% sustainable RoE using June 2010 cut-off dates.