Danareksa Bank Danamon Foundation for growth

The decision to acquire an additional 20% stake in Adira is a positive move
For an additional 20% stake in Adira (the largest multifinance company by market cap), BDMN will have to pay around Rp1.6trn. The deal will lift BDMN’s ownership in Adira to 95%. While there will not be a significant impact at the operating level, the transaction will give a slight boost to earnings after accounting for goodwill amortization and lower minorities. All in all, we view the deal positively: it is not earnings dilutive and BDMN will benefit from greater exposure to the profitable consumer sector and Adira’s higher ROE. The transaction is expected to be completed by July.

The deal is not dilutive
At 8x PER’08, the transaction is not earnings dilutive given that BDMN’s current multiple is much higher at 14x FY09 PER. Yes, on a PBV basis, the deal appears to be quite rich at around 4.2x PBV’08, yet the phenomenal 64% ROE more than compensates. Effectively, Adira is valued at only 7x its ability to generate returns (PBV/ROE) vis-à-vis BDMN’s 13x. Besides, if we assume a 20% increase in earnings next year, Adira’s PBV will decline to just 2x by 2010E.

A good strategic fit
We believe the acquisition fits well with BDMN’s current strategy of expanding its consumer lending - in particular to the mass market segment. This segment accounts for around 47% of the bank’s total loans or up significantly from 2004’s 24%. Besides the stable NPLs of just 3%, lending rates on consumer loans can reach as high as 32% and also tend to be sticky when interest rates are on the decline. In fact, BDMN’s strategy of focusing on consumer lending has boosted its NIM to an enviable 10-11%, the highest in the industry. Going forward, BDMN is well placed to grow its consumer loans by around 15%-20% in FY09-10, supported by the declining BI rate, benign inflation and the Rp73trn fiscal stimulus.

Higher earnings already anticipated; slight adjustment to CAR
Our forecast already anticipated the acquisition of an additional 20% stake in Adira with the minorities lowered to account for a higher stake in Adira. Nonetheless, we do expect a slight decline in the CAR to around 15.2% from our previous estimate of 17%. However, this is still way above BI’s minimum requirement of 8%, showing there is still plenty of room for the bank to extend new loans. For the time being, we make no changes to our forecast or TP. At Rp3,600, our TP offers 24% upside to the current share price. Our DDM derived TP implies 2.3-2.1x FY09-10E PBV and 17.8-12.9x FY09-10E PER. Maintain BUY.