We upgrade our recommendation for Bank Mandiri to Outperform from Underperform and raised our target price to Rp3,700. Below are the reasons behind the change in our view.
Impact
Flash back to our underperform call on Mandiri. On 20 January 2009, we downgraded Bank Mandiri to Underperform, based on four concerns: 1) high forex loan exposure (25% of total loans); 2) 12% of total loans were previously restructured loans and could be converted into NPLs amid the tough economic environment; and 3) exposure to agriculture including CPO; and 4) uncertainty regarding the successor to the current CEO.
Our key concerns have now dissipated as: 1) the rupiah has strengthened to around Rp10,000/US$1 from Rp12,000+ about five months ago; Mandiri has converted some forex loans and reduced its position to 21% as of 1Q09; 2) the domestic economy is proving to be resilient with 1Q09 GDP growth of 4.4% and a more positive economic outlook; Mandiri's aggressive restructuring should also help keep NPLs stable; 3) commodity prices, ie, CPO and rubber, have rebounded significantly; and 4) we believe that concerns over the potential departure of CEO Agus Martowardojo is now in the share price; Martowardojo may be appointed by President SBY to a ministerial post should he win a second term.
What are the catalysts? We believe the next catalyst for the bank will be an improved performance in 2Q09 following a mediocre 1Q09. Mandiri has managed to reprice its loans faster than the deposits rate because more than 65% of its loan book is variable corporate loans and floating rate government bonds, while 43% of its third-party fund is time deposits. The company expects NIM to pick up in 2Q as time deposit repricing takes full effect, and stay at around the 5.4% level in 2009.
Earnings and target price revision
No change in estimates, but we raise our target price to Rp3,700 (from Rp2,500 previously) as we adjust our long-term ROE to 20% from 19%.
Price catalyst
12-month price target: Rp3,700 based on a Gordon growth methodology.
Catalyst: Better-than-expected performance in 2Q09 and higher loan growth.
Action and recommendation
Outperform; TP upgrade. Mandiri's share price performance has lagged the rest of the Indonesian banks (underperforming BRI, Danamon and BNI by -7%, -23% and -89%, respectively). The stock is now trading at one of the most attractive P/BV of 1.8x, a 28% discount to the sector average. We suggest that investors switch out of Bank Rakyat given its more expensive valuation of 3.0x and into Bank Mandiri.
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