BTN is the dominant mortgage lender in Indonesia with 27% market share. More importantly, BTN holds a virtual monopoly on the subsidized housing market. This subsidy continues to increase and is expected to rise at least 75% in 2010 to Rp3.1tn and potentially higher.
* Indonesia consists of 61.5M hh, and 71% live on less than $3K per year. This market is the target for BTN's subsidized mortgage product. Indo mortgages represents 2.3% of GDP, with natural growth to $23bn ($1.0tn GDP by 2014). An extended period of low rates, mortgages could approach 4% of GDP, or $40bn in 2014. With 27% market share this implies BTN has $11bn in mortgages or nearly a 300% rise over the next 5 years
* The scheme offers subsidized mortgage flexibility. The subsidy is projected to rise to Rp3.1tn from approximately Rp1.8tn in 2009 and the tenor of the subsidy could increase to the entire 10-15yr mortgage as opposed to the existing 6 year subsidy with rates adjusting higher after year 6.
* Selling price of subsidized homes to Rp62.5m from Rp55m, increasing the selling price for developers and making construction more profitable. This could fuel a significant rise in subsidized home construction versus the current level of 100-120k units p.a.
* ROE is low and LDR is high. This is not a problem for the bank. The ROE is low because of the recent IPO. Whats more important is that loan growth remains strong, allowing the ROE to increase as capital is fully deployed. The LDR on an adjusted basis falls to approximately 75% when accounting for the equity overhang. LDR can climb north of 120% without a capital raise being necessary by our calculations.
* Shares trade at a discount to Indonesian peers, currently at 1.6x / 9.4x 2011 PBV and PE for a bank with a virtual monopoly on subsidized housing in Indonesia. The valuation metrics represent a discount of 31% and 25% to Indonesian peers. Our fair value is based on a modest premium at 2011 PBV/PE of 2.3x and PE 13.5x,justified by 50% earnings growth through 2012, ROE surpassing 20%
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