DBS Bank Mandiri: Buy; Rp5,250; TP Rp6,600; BMRI IJ

To raise up to Rp7tn from rights issue
Bank Mandiri plans to sell new shares amounting to 11% of enlarged capital in the second half this year to strengthen its capital structure. The new shares are worth between Rp6tn and Rp7tn. The company also said that if the government does not exercise its rights to buy the shares, its shareholding would decline to 60%. With the rights issue, the bank will have a capital adequacy ratio (CAR) of between 12-15% in 2011-14 despite of average credit growth of 20-21%. Without rights issue CAR could drop to below 12%. If the plan fails to materialize, Mandiri would issue subordinated debt worth Rp3tn in second half of this year or early 2011.

Earlier, several other media reports stated that BMRI has proposed to the State Owned Ministry its plan to increase free float to a minimum of 40% (from 33% currently) to qualify for a 5ppt tax incentive. The bank’s management revealed three options through which it can achieve this: (i) secondary offering, (ii) private placement to strategic investor, or (iii) a combination of both. The government, which currently owns 66.8% stake in the bank, will decide which option to pursue. The management expects the plan to be executed in 2Q10 at the earliest. While positive, again, key risk is timing. The impact is estimated at 5-7% upside to FY10-11 earnings.

The 5ppt tax benefit from increasing BMRI’s free float to 40% (from 33% currently) could get protracted depending on the time taken for the necessary approvals. This could also be a positive catalyst to earnings. BMRI remains our top pick with a Buy recommendation and TP of Rp6,600.