Event
· We met with Adira Finance management yesterday and they are upbeat on the 2010 outlook. Adira is a listed motorcycle financing subsidiary and is 95% owned by Bank Danamon. We expect Adira to contribute more than 50% of Bank Danamon's net profit in 2010. Our conversation with Federal International Finance (Astra International's motorcycle financing arm) also indicated a strong performance in the 1Q10.
Impact
· Financing volume to improve in 2010 given the strong pace in 1Q10. Adira Finance become more confident on the economic outlook after having a cautious view, especially in 1H09. As such it expects financing value to grow by 20% this year vs only 4% last year.
· Net profit is likely to go up by more than 25% given the lower cost of fund and higher financing volume. In 2009, Adira was able to book 19% net profit growth despite having 4% financing growth. We expect Adira's ROE to hover around the 50%+ level with a net interest margin of 15%. Adira's net profit in 2009 reached Rp1.2tr and we expect its net profit to reach more than Rp1.5tr in 2010 vs Bank Danamon net profit of around Rp2.6tr.
· Adira's NPL should remain manageable; the company expects NPL to remain at around 1%.
Action and recommendation
· Strong Adira performance should help support Bank Danamon's performance; Outperform. We expect Adira to account for more than 50% of Danamon's profitability in 2010. We continue to like Danamon because it is a beneficiary of lower interest rates and increasing consumer purchasing power. We maintain an OP rating on Bank Danamon with a price target of Rp6,800/share, translating to 23% upside potential. On our estimates, Danamon is currently trading on 2010E P/BV of 2.7x vs the sector at 3.3x with 71% EPS growth vs the industry at 25%.
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