JP Morgan - Buy Perusahaan Gas Negara (PGAS)
Buy Perusahaan Gas Negara (PGAS): 2Q10 results addressed earlier concerns about gas volume drop-off, that was caused by government intervention on gas allocation. Distribution volume is returning to normal but more importantly, average selling price jumped 5.4% QoQ, driving a 16% QoQ growth in EBIT. If we assume the 2Q10 EBIT of Rp2,456bn is sustained in Q3 and Q4, full year EBIT can reach around Rp9.5trn – this is 8% higher than consensus of Rp8.8trn and 25% higher than Stevanus Juanda’s number. If we assume the 2Q10 core net income of Rp1,746bn is sustained in Q3 and Q4, full year core net income can reach around Rp6.7trn – this is 5% higher than consensus of Rp6.4trn and 22% higher than Stevanus Juanda’s number. Bottom-line: concerns on 2011 outlook appear unfounded as forecast for the base year (2010) is being revised upward; the stock trades on attractive P/E multiple of 14.5x FY10 with a 3-4% dividend yield. The stock may re-rate on the back of a continuing decline in Indonesia 10YR government bond yield.
Mandiri Sekuritas PGAS:65.7% gross margin post tariff hike TP IDR5260
15% increase in gas price effective April 1, 2010 subdued lower distributed gas volume (-3.3%QoQ) and giving 12.7% qoq increase in revenue and 16.4% QoQ in operating profit. Post the impact of increase, no short-term catalysts until mid-2012 where PGAS expected to have 180MMSCFD (equity accounted) new supply from West Java FSRT JV with Pertamina. We upgraded our estimates on lower than estimated COGS, resulted in new target price of Rp5,260/share. Admittedly, catalysts are limited, and therefore news on progress in the FSRT project are much needed.
A thicker margin. PGAS recorded a gross margin of 65.7% in 2Q10, up from 60.8% in 1Q10, and 59.3% in 1H09. An increase in average gas price of 8.6% in Q2 to US$6.84/MMBTU helped beefed up the margin. 20% composition of IDR in PGAS tariff resulted in higher ASP in USD terms compared with US$6.3/MMBTU, PGAS indicated. Transmission and fiber optics was up 8.5% QoQ to Rp424bn.
No short-term catalysts seen. PGAS is currently implementing a thorough FSRT (Floating Storage Regasification Terminal) tendering process to avoid any tender dispute. Due to this, a discount have to be applied for the 2012 target of completion to prevent over optimistic expectation. There were also scant progress in gas fields’ acquisitions and additional supplies from gas producers. PGAS CEO, Hendy P. Santoso quoted by Bloomberg, said that he saw limited additional supply in 2011
Rising target price. We revised down our cost of gas on improved gas supply from Conoco Phillips (CoPhi). As CoPhi volume has improved, cost of gas have to be lowered since CoPhi’s gas is priced at US$1.85/MMBTU which is lower than average cost of gas of US$2.53/MMBTU. Our new target price of Rp5,260/share is 13.1% higher than our previous target price.
CLSA PGAS, Lack of catalysts – Downgrade to OPF, from Swati
Indonesia has massive gas reserves but yet a big deficit of gas supply (Domestic gas price now almost double of Henry Hubs). PGAS has been one of the best structural story being in the forefront of delivering stranded gas to gas hungry island of Java. However, the structural story (lack of gas supply) has recently been a bit of a doubled edge sword for gas. Its simply cannot secure any meaningful gas supply contract when demand is surging. LNG receiving terminals is a great solution but unfortunately still 3 years away. With the domestic consumption story taking off in Indonesia, PGAS will have limited operating leverage to benefit. Still great LT story at reasonable valuation but status quo (note we have not change our earnings forecast) means underperformance in the meantime. Patience required.
· PGas is a structural growth story of Indonesia’s shift to gas often marred with execution disappointments.
· We expect material new gas supply only in 2013 when LNG comes on-stream. There could be further delay on this as it will take 24-36months to complete the LNG project from date it’s commenced. Pgas has not signed any firm gas contract for LNG.
· We expect new contracts (piped and LNG receiving terminal to be signed in next six months but this does not mean actual gas supply will increase before 2012 as it takes time to monetize gas.
· We downgrade the stock to outperform in absence of any price and volume growth in foreseeable future. That said, we are not turning negative (although less positive) as the stock is cheap, trading at 10.7x 2011CL, with a solid balance sheet, 45% ROE, 22% ROA and 5.6% div yield.
· The stock should re-rate on progress of LNG receiving terminal and new volume contracts.
NISP Perusahaan Gas Negara sets 2011F capex at US$600mn
· Perusahaan Gas Negara is budgeting US$600mn or Rp5.58tn for capex in 2011. This is almost 3 times of the capex this year, which ranges between US$200-250mn.
· PGN CEO, Mr.Hendi Prio Santoso, states that the budget includes acquisition cost for an oil and gas block of US$350mn in response to the growing demand. In addition the company will acquire a gas tank costing US$50mn.
· Capex will 30% be financed from internal cash. The company has currently Rp9.53tn in cash. The balance will be sourced externally however no details have been shared.
· PGAS is trading at 2011F PER of 12.3x and EV/EBITDA of 7.4x.
DBS Perusahaan Gas Negara: Strong 2Q earnings TP Rp4,800
At a Glance
• 2Q10 results in line with expectations
• On track to meet target sales volume and forecasts
• New gas supply contract supports higher volume and tariffs
• Promising outlook but trades at discount to regional peers’ valuations
• Maintain Buy and TP of Rp4,800, with 20% upside.
Comment on Result
2Q revenue grew 11% y-o-y to Rp5t.0tr on 9.3% and 11% increases in gas distribution and transmission volume to 827 MMScfd and 847 MMScfd, respectively.
2Q EBIT improved by a stronger 27% y-o-y to Rp2.5tr helped by 6ppt increase in operating margin following an average 15% hike in gas price for industrial and commercial users in Indonesia effective 1 April 2010. 2Q net profit (excluding forex loss on loan translation) grew by an even stronger 66% y-o-y to Rp1.6tr supported by both higher volume and tariff rates.
Outlook for PGAS is promising given its recent new gas supply contract with ConocoPhillip from Grissik field. Given PLN ’s urgent need for gas, we expect more new supply to come trough over the next few months. We estimate that every 10ppt increase in gas supply will boost PGAS FY10F net earnings by 11.4%.
Recommendation
PGAS is poised to benefit from Indonesia’s rising energy demand fuelled by strong economic growth and rapid infrastructure development. Maintain Buy and DCF-derived target price of Rp4800. PGAS is trading at attractive 12x FY11F PE versus peers’
average of 17x, despite its more promising growth prospects. It also offers higher net dividend yield of 4% versus regional peers’ average of 2%.
Credit Suisse: Perusahaan Gas Negara - Strong 2Q10 results on higher selling prices TP idr5,300
● PGAS posted 2Q10 recurring net profit of Rp1,885 bn, up 35% QoQ and 56% YoY mainly due to higher selling prices. Its reported net profit of Rp1,435 bn in 2Q10 declined 19% QoQ and 27% YoY due to forex and derivative losses.
● The recurring net profit was above our expectation, at about 53% of our 2010 forecast (and 51% of the consensus estimate), as we expect a better 2H10. Gas ASP of US$6.83 in 2Q10 was above our forecast of US$6.4, while the average gas blended cost of US$2.54 was in line with our 2010 forecast. The positive impact of higher ASP was partially offset by weaker 2Q distribution volumes of 813 mmscfd, down 3% QoQ.
● We expect higher distribution volumes in 2H10 due to a recovery in Conoco volumes. Since June 2010, Conoco volumes have recovered to an average of 340 mmscfd, versus its 2010 contract of 350 mmscfd.
● We increase our forecast for average realised selling price to US$6.6/mmbtu, based on higher realised selling prices achieved in 2Q10. We maintain our positive view and our OUTPERFORM rating on PGAS and our DCF-based target price of Rp5,300.
Rabu, 15 September 2010
Minggu, 12 September 2010
CLSA Bank Danamon up 4.7% on the back of DBS raising US$10bn debt
DBS announced this morning an intent to raise US$10bn in senior debt. Please see below, comment from Bret Ginesky.
DBS announced this morning an intent to raise US$10bn in senior debt
While this raise was announced in June today the bank appointed investment banks to sell the offering.
DBS is formally stating that this is for "general funding" purposes
We believe funds could be used to purchase Temasek's 76% in Bank Danamon
Bank Danamon rose 4.7% today on heavy trading of US$12m
We believe Danamon shares could fetch 3.0x book or higher, reflecting a share price of Rp6,400 or higher, which is 15% upside from today's close
While we currently rate the stock an underperform, M&A speculation will continue to drive the shares higher. Our rec is under review.
Please see additional comments by Singaporean bank analyst Derek Ovington:
I think it's important to stress that there's an innocuous explanation for DBS raising so much debt, and that is to fund its growing balance sheet at relatively low cost given low bond yields right now.
However, as Bret points out the BDMN trading suggests there could be more to it than that.
Attached is the note that I wrote on the DBS-BDMN hypothetical. While the deal would be prima facie dilutive, and materially so, the note also shows that DBS could leverage up to mask the dilution and make a 3x book deal at least look more palatable. That's why I can't discount the possibility of a transaction.
I still think there's a low probability that DBS/Temasek will do it, but I may be over-rating their commercial judgement and/or under-rating their strategic desire.
In my view, M&A risk is just another reason to sell DBS (U-PF). It's expensive, has the weakest return profile and is the Singapore bank most exposed to margin downside.
DBS announced this morning an intent to raise US$10bn in senior debt
While this raise was announced in June today the bank appointed investment banks to sell the offering.
DBS is formally stating that this is for "general funding" purposes
We believe funds could be used to purchase Temasek's 76% in Bank Danamon
Bank Danamon rose 4.7% today on heavy trading of US$12m
We believe Danamon shares could fetch 3.0x book or higher, reflecting a share price of Rp6,400 or higher, which is 15% upside from today's close
While we currently rate the stock an underperform, M&A speculation will continue to drive the shares higher. Our rec is under review.
Please see additional comments by Singaporean bank analyst Derek Ovington:
I think it's important to stress that there's an innocuous explanation for DBS raising so much debt, and that is to fund its growing balance sheet at relatively low cost given low bond yields right now.
However, as Bret points out the BDMN trading suggests there could be more to it than that.
Attached is the note that I wrote on the DBS-BDMN hypothetical. While the deal would be prima facie dilutive, and materially so, the note also shows that DBS could leverage up to mask the dilution and make a 3x book deal at least look more palatable. That's why I can't discount the possibility of a transaction.
I still think there's a low probability that DBS/Temasek will do it, but I may be over-rating their commercial judgement and/or under-rating their strategic desire.
In my view, M&A risk is just another reason to sell DBS (U-PF). It's expensive, has the weakest return profile and is the Singapore bank most exposed to margin downside.
Danareksa Plantation Sector (OVERWEIGHT) La Nina strikes
Firm CPO price likely to be sustained into next year
The recent upsurge in the CPO price validates our previous argument made in the early part of the year. This is that CPO production has only been marginally higher due to the impact from bad weather and partly due to poor yields amid unexpected production declines from substitutes. This weaker supply growth - and stronger global demand - has resulted in higher CPO prices. While CPO production may improve in 2H on seasonality, the severity of heavy rainfall will cap production at 46.9mn tons this year – a mere 1.6mn tons increase, or lower than 2009’s 2.0mn tons increase. For now, we maintain our benchmark CPO price estimates at US$850-860/mt CIF for FY10-11E respectively. Our production estimates for Indonesian plantations, however, are cut by 24-16%, as poor yields prevail, slashing the FY10-11E EPS by 39-28% respectively. At the same time, we cut our recommendation on AALI to HOLD, while keeping the rest intact. Our top pick remains on BWPT, mainly due to its robust production and profitability. We also initiate coverage on LSIP with a BUY and a TP of Rp11,250.
Demand supply imbalances to persist
Consumption of global vegetable oil is likely to increase by 3.9% over the course of one year, a touch below its production growth of 4.0%. The risk shall still be on the supply side, we believe. Heat and dryness in West Europe, Russia, Kazakhstan and some parts of South America have affected the grain and oilseed crops. Canada and Eastern Europe, on the other hand, have been too wet. As a consequence, over 3mn tons of rapeseed is expected to be lost over the next season, capping global vegetable oil supply growth. Note that oil yields on rapeseed have been around 39-43%, and therefore making a significant contribution to vegetable oil supply. Soybean, however, may see higher production in the US on larger than expected plantings, albeit much of them shall likely be offset by a sharp decline in South America’s production, largely due to a shift in plantings towards wheat and sunflower seed aside from smaller average yields. On a net basis, soybean production is likely to drop by as much as 3.4mn tons next season. Soybean-crushing activities, however, may have picked up, but much of the resulting soya oil will be absorbed for bio-fuel purposes, hence the sustained robust demand for palm oil and positive price outlook.
Strained by bio-fuel consumption
As much as we hate to admit it, the rising consumption of vegetable oil for bio-fuel purposes is likely to result in food and energy tussles. Almost half of the increase in global vegetable oil consumption is used for bio-fuel feedstock. The EU, which uses 60% of rapeseed oil consumption in the EU for bio-fuel purposes, may see a shortage of feedstock supply over the next season, pushing the price above US$465/ton, as alternatives are limited due to technical requirements. Even if there is stock availability, it will have to compete with China’s requirement for food purposes. The significant price premium of rapeseed, however, will lead to greater demand for cheaper alternatives such as palm oil. Meanwhile, the largest exporters of soya oil, Brazil and Argentina, will see their exports dwindle next year. Indeed, soya oil is the major feedstock for Argentina’s (90%) and Brazil’s (83%) bio-diesel production. Argentina’s government has raised the mandatory admixture of bio-diesel to 7% starting next month from currently 5% and will raise it further to 10% starting next year. As for Brazil, the government has kept its 5% mandatory admixture of bio-diesel.
Short term CPO production setback
While we expect CPO yields to improve over the course of one year, the short-term (about 6 months) production increase will still be marginal. Heavy rainfall has limited pollination from taking place and led to slower production growth. The next 18 months will be crucial for palm oil production, we believe, as the effects from heavy rainfall will lead to smaller bunches being produced, aside from lower quality and a lower OER. At least for Indonesian plantations, production is expected to grow by about 1.2mn tons this year, or lower than 2009’s increase of 1.9mn tons. Some 5.7mn ha are expected to be mature this year, just an additional 380,000ha from 2009’s 5.4mn ha. By next year, the production increase will basically emerge from newly mature areas from plantings done in 2006-2007, some additional 400,000ha. And as for Malaysia’s plantations, maturing areas will stay the same. Over the longer term, production may also be hampered by a lack of new plantings as erratic rainfall continues. This is aside from the government’s role of limiting new land bank issued to planters.
The recent upsurge in the CPO price validates our previous argument made in the early part of the year. This is that CPO production has only been marginally higher due to the impact from bad weather and partly due to poor yields amid unexpected production declines from substitutes. This weaker supply growth - and stronger global demand - has resulted in higher CPO prices. While CPO production may improve in 2H on seasonality, the severity of heavy rainfall will cap production at 46.9mn tons this year – a mere 1.6mn tons increase, or lower than 2009’s 2.0mn tons increase. For now, we maintain our benchmark CPO price estimates at US$850-860/mt CIF for FY10-11E respectively. Our production estimates for Indonesian plantations, however, are cut by 24-16%, as poor yields prevail, slashing the FY10-11E EPS by 39-28% respectively. At the same time, we cut our recommendation on AALI to HOLD, while keeping the rest intact. Our top pick remains on BWPT, mainly due to its robust production and profitability. We also initiate coverage on LSIP with a BUY and a TP of Rp11,250.
Demand supply imbalances to persist
Consumption of global vegetable oil is likely to increase by 3.9% over the course of one year, a touch below its production growth of 4.0%. The risk shall still be on the supply side, we believe. Heat and dryness in West Europe, Russia, Kazakhstan and some parts of South America have affected the grain and oilseed crops. Canada and Eastern Europe, on the other hand, have been too wet. As a consequence, over 3mn tons of rapeseed is expected to be lost over the next season, capping global vegetable oil supply growth. Note that oil yields on rapeseed have been around 39-43%, and therefore making a significant contribution to vegetable oil supply. Soybean, however, may see higher production in the US on larger than expected plantings, albeit much of them shall likely be offset by a sharp decline in South America’s production, largely due to a shift in plantings towards wheat and sunflower seed aside from smaller average yields. On a net basis, soybean production is likely to drop by as much as 3.4mn tons next season. Soybean-crushing activities, however, may have picked up, but much of the resulting soya oil will be absorbed for bio-fuel purposes, hence the sustained robust demand for palm oil and positive price outlook.
Strained by bio-fuel consumption
As much as we hate to admit it, the rising consumption of vegetable oil for bio-fuel purposes is likely to result in food and energy tussles. Almost half of the increase in global vegetable oil consumption is used for bio-fuel feedstock. The EU, which uses 60% of rapeseed oil consumption in the EU for bio-fuel purposes, may see a shortage of feedstock supply over the next season, pushing the price above US$465/ton, as alternatives are limited due to technical requirements. Even if there is stock availability, it will have to compete with China’s requirement for food purposes. The significant price premium of rapeseed, however, will lead to greater demand for cheaper alternatives such as palm oil. Meanwhile, the largest exporters of soya oil, Brazil and Argentina, will see their exports dwindle next year. Indeed, soya oil is the major feedstock for Argentina’s (90%) and Brazil’s (83%) bio-diesel production. Argentina’s government has raised the mandatory admixture of bio-diesel to 7% starting next month from currently 5% and will raise it further to 10% starting next year. As for Brazil, the government has kept its 5% mandatory admixture of bio-diesel.
Short term CPO production setback
While we expect CPO yields to improve over the course of one year, the short-term (about 6 months) production increase will still be marginal. Heavy rainfall has limited pollination from taking place and led to slower production growth. The next 18 months will be crucial for palm oil production, we believe, as the effects from heavy rainfall will lead to smaller bunches being produced, aside from lower quality and a lower OER. At least for Indonesian plantations, production is expected to grow by about 1.2mn tons this year, or lower than 2009’s increase of 1.9mn tons. Some 5.7mn ha are expected to be mature this year, just an additional 380,000ha from 2009’s 5.4mn ha. By next year, the production increase will basically emerge from newly mature areas from plantings done in 2006-2007, some additional 400,000ha. And as for Malaysia’s plantations, maturing areas will stay the same. Over the longer term, production may also be hampered by a lack of new plantings as erratic rainfall continues. This is aside from the government’s role of limiting new land bank issued to planters.
CLSA Indo banks by Bret Ginesky
This is has been talked about for a while and expected by the market. To facilitate a more competitive lending landscape and the same time making sure there is a wide enough safety net, BI will start penalizing banks with LDR at extreme ends and ask for higher reserves. There is going to be short term impact to earnings esp for Banks with low LDR like BCA but most likely going to be mostly offset by higher fee income. Does not change the structural story. Remain OWT Indo banking sector.
· Bank Indonesia’s minimum required reserves now stand at 10.5% from 7.5% previously. As a new primary reserve of 3% of rupiah deposits was added. These funds will earn a 2.5% interest rate.
· A liquidity reserve was also imposed penalizing banks with an LDR below 78% and above 100%. The point of this is to increase competition and lending.
· BI tightens policy without raising interest rates allowing the central government to buffer the inflow of funds into the country. Indonesia already boasts one of the lowest required reserves in our Asia (xJapan) coverage universe, this helps bring reserves closer to the peer median.
· Banks will almost certainly do their utmost to offset these costs through fees, charges and possibly higher interest rates. The net impact on 2011 is to lower earnings by 4-8%. BCA is the most affected.
· We remain OWT the sector as they are a prime beneficiary of accelerating growth and asset reflation. Our top picks are BBNI and BMRI. UWT BDMN.
· Bank Indonesia’s minimum required reserves now stand at 10.5% from 7.5% previously. As a new primary reserve of 3% of rupiah deposits was added. These funds will earn a 2.5% interest rate.
· A liquidity reserve was also imposed penalizing banks with an LDR below 78% and above 100%. The point of this is to increase competition and lending.
· BI tightens policy without raising interest rates allowing the central government to buffer the inflow of funds into the country. Indonesia already boasts one of the lowest required reserves in our Asia (xJapan) coverage universe, this helps bring reserves closer to the peer median.
· Banks will almost certainly do their utmost to offset these costs through fees, charges and possibly higher interest rates. The net impact on 2011 is to lower earnings by 4-8%. BCA is the most affected.
· We remain OWT the sector as they are a prime beneficiary of accelerating growth and asset reflation. Our top picks are BBNI and BMRI. UWT BDMN.
CLSA Mango Mania
The market charged ahead in full steam setting yet another record high at 3,217 yesterday. Foreign investors have stepped up buying giving support to the big cappers. Turnover over the last couple of days has been surprisingly good even tough it will be a short week for Indonesia. Market will be closed from 8 - 14 August for Hari Raya holiday. We may see some profit taking from the local camps ahead of long holiday.
In his latest presentation “Mango Mania”, Nick Cashmore has just laid out reasons to own ASEAN (please see attached). As a region, ASEAN has an interesting history. The oldest university in Asia is located in the Philippines (Santo Tomas, 1611). The region also boasts the largest Buddhist monument in world (Indonesia, Borobudur 9th century). The longest reigning monarch in the world is in Thailand. One of the Asian greatest sport heroes is from this region: Manny Pacquiao from the Philippines.
Of course the region faces many challenges (high logistic costs and weak institutional structures among others) but still there many more positive attributes and potentials.
Economically, ASEAN generates GDP of US$1.6tn and has doubled since 2005. GDP is about the same size of India. Per capita GDP is approaching US$3,000. The region is globally competitive is soft commodities and is among one of the least indebted areas in the world (pls see the chart below). Plenty of rooms to add leverage into the system. Clearly, ASEAN is a force to be reckoned with.
SE Asians also have the knack for rapid reproduction. Demographics is also looking great with a population of 600mn of whom more than half are less than 30 years old. To put it into perspective, within two decades SE Asia will be larger than Europe in terms of population. And in the next 15 years, SE Asia will add as many people as China.
A stockbroker can make a nice career broking ASEAN market these days. SE Asia is now more liquid and meaningful for investors. Combined market cap is US$1.5tn with daily average turnover of US$3.8bn.
Two blue chip Indonesian stocks mentioned in the report are BCA (BBCA IJ) and Indocement (INTP IJ). For mid and small cap ideas, we like Holcim (SMCB IJ) and biscuit maker Mayora (MYOR IJ).
In his latest presentation “Mango Mania”, Nick Cashmore has just laid out reasons to own ASEAN (please see attached). As a region, ASEAN has an interesting history. The oldest university in Asia is located in the Philippines (Santo Tomas, 1611). The region also boasts the largest Buddhist monument in world (Indonesia, Borobudur 9th century). The longest reigning monarch in the world is in Thailand. One of the Asian greatest sport heroes is from this region: Manny Pacquiao from the Philippines.
Of course the region faces many challenges (high logistic costs and weak institutional structures among others) but still there many more positive attributes and potentials.
Economically, ASEAN generates GDP of US$1.6tn and has doubled since 2005. GDP is about the same size of India. Per capita GDP is approaching US$3,000. The region is globally competitive is soft commodities and is among one of the least indebted areas in the world (pls see the chart below). Plenty of rooms to add leverage into the system. Clearly, ASEAN is a force to be reckoned with.
SE Asians also have the knack for rapid reproduction. Demographics is also looking great with a population of 600mn of whom more than half are less than 30 years old. To put it into perspective, within two decades SE Asia will be larger than Europe in terms of population. And in the next 15 years, SE Asia will add as many people as China.
A stockbroker can make a nice career broking ASEAN market these days. SE Asia is now more liquid and meaningful for investors. Combined market cap is US$1.5tn with daily average turnover of US$3.8bn.
Two blue chip Indonesian stocks mentioned in the report are BCA (BBCA IJ) and Indocement (INTP IJ). For mid and small cap ideas, we like Holcim (SMCB IJ) and biscuit maker Mayora (MYOR IJ).
Mandiri Sekuritas Automotive sector: reported car and motorcycle sales for Aug10
According to Bisnis Indonesia, car sales in August decreased by 10% MoM from 72,090 units in Jul10 to 64,757 units in Aug10, bringing its 8M10 car sales to grow by 69% yoy. The decline was due to limited number of production from car manufacturers, thus piling up the number of pre-order cars. Toyota was still the leader with 22,638 units of car sales or representing 34.9% of total car sales Separately, it is also reported that motorcycle sales volume increased by 5% MoM in Aug10 from 699,411 units in Jul10 to 731,921 units in Aug10, bringing 8M10 motorcycle sales to 5,030,654 units (+35% YoY).
Mandiri Sekuritas PGAS:65.7% gross margin post tariff hike
15% increase in gas price effective April 1, 2010 subdued lower distributed gas volume (-3.3%QoQ) and giving 12.7% qoq increase in revenue and 16.4% QoQ in operating profit. Post the impact of increase, no short-term catalysts until mid-2012 where PGAS expected to have 180MMSCFD (equity accounted) new supply from West Java FSRT JV with Pertamina. We upgraded our estimates on lower than estimated COGS, resulted in new target price of Rp5,260/share. Admittedly, catalysts are limited, and therefore news on progress in the FSRT project are much needed.
A thicker margin. PGAS recorded a gross margin of 65.7% in 2Q10, up from 60.8% in 1Q10, and 59.3% in 1H09. An increase in average gas price of 8.6% in Q2 to US$6.84/MMBTU helped beefed up the margin. 20% composition of IDR in PGAS tariff resulted in higher ASP in USD terms compared with US$6.3/MMBTU, PGAS indicated. Transmission and fiber optics was up 8.5% QoQ to Rp424bn.
No short-term catalysts seen. PGAS is currently implementing a thorough FSRT (Floating Storage Regasification Terminal) tendering process to avoid any tender dispute. Due to this, a discount have to be applied for the 2012 target of completion to prevent over optimistic expectation. There were also scant progress in gas fields’ acquisitions and additional supplies from gas producers. PGAS CEO, Hendy P. Santoso quoted by Bloomberg, said that he saw limited additional supply in 2011
Rising target price. We revised down our cost of gas on improved gas supply from Conoco Phillips (CoPhi). As CoPhi volume has improved, cost of gas have to be lowered since CoPhi’s gas is priced at US$1.85/MMBTU which is lower than average cost of gas of US$2.53/MMBTU. Our new target price of Rp5,260/share is 13.1% higher than our previous target price.
A thicker margin. PGAS recorded a gross margin of 65.7% in 2Q10, up from 60.8% in 1Q10, and 59.3% in 1H09. An increase in average gas price of 8.6% in Q2 to US$6.84/MMBTU helped beefed up the margin. 20% composition of IDR in PGAS tariff resulted in higher ASP in USD terms compared with US$6.3/MMBTU, PGAS indicated. Transmission and fiber optics was up 8.5% QoQ to Rp424bn.
No short-term catalysts seen. PGAS is currently implementing a thorough FSRT (Floating Storage Regasification Terminal) tendering process to avoid any tender dispute. Due to this, a discount have to be applied for the 2012 target of completion to prevent over optimistic expectation. There were also scant progress in gas fields’ acquisitions and additional supplies from gas producers. PGAS CEO, Hendy P. Santoso quoted by Bloomberg, said that he saw limited additional supply in 2011
Rising target price. We revised down our cost of gas on improved gas supply from Conoco Phillips (CoPhi). As CoPhi volume has improved, cost of gas have to be lowered since CoPhi’s gas is priced at US$1.85/MMBTU which is lower than average cost of gas of US$2.53/MMBTU. Our new target price of Rp5,260/share is 13.1% higher than our previous target price.
CLSA Indonesia Policy: no hike but more hawkish
Bank Indonesia held its policy BI rate at 6.5%. However, with increasing concerns ‘of future inflationary pressure’ and in response to ‘considerable excess liquidity in the banking system’, Bank Indonesia hiked reserve requirements. We believe the measure is more conservative than originally anticipated.
Bank Indonesia’s twin objectives are preventing excess liquidity from fueling inflation and ensuring that liquidity is channeled through the banking sector into the real economy. The policy dilemma arises from higher interest rates curbing demand but at the same time exacerbating capital inflows. This explains its reluctance to hike interest rates.
The two key changes are the primary reserve two, which adds 3% to the primary reserve. This 3% will earn interest at Bank Indonesia of 2.5%. The second key change is the LDR related reserve. The additional 3% primary reserve must be posted at Bank Indonesia by November 1, 2010 and the LDR linked required reserve must be posted at Bank Indonesia by March 1, 2011.
As the above table indicates the greatest impact will be to BCA (BBCA IJ) and Bank Mandiri (BMRI IJ).
The least impact will be on BRI (BBRI IJ) and BNI (BBNI IJ). Meantime, BTN (BBTN IJ) and Danamon (BDMN IJ), despite their high LDRs, are going to be affected less as their CAR is higher than 14%.
Bank Indonesia’s twin objectives are preventing excess liquidity from fueling inflation and ensuring that liquidity is channeled through the banking sector into the real economy. The policy dilemma arises from higher interest rates curbing demand but at the same time exacerbating capital inflows. This explains its reluctance to hike interest rates.
The two key changes are the primary reserve two, which adds 3% to the primary reserve. This 3% will earn interest at Bank Indonesia of 2.5%. The second key change is the LDR related reserve. The additional 3% primary reserve must be posted at Bank Indonesia by November 1, 2010 and the LDR linked required reserve must be posted at Bank Indonesia by March 1, 2011.
As the above table indicates the greatest impact will be to BCA (BBCA IJ) and Bank Mandiri (BMRI IJ).
The least impact will be on BRI (BBRI IJ) and BNI (BBNI IJ). Meantime, BTN (BBTN IJ) and Danamon (BDMN IJ), despite their high LDRs, are going to be affected less as their CAR is higher than 14%.
CLSA PGAS, Lack of catalysts – Downgrade to OPF, from Swati
Indonesia has massive gas reserves but yet a big deficit of gas supply (Domestic gas price now almost double of Henry Hubs). PGAS has been one of the best structural story being in the forefront of delivering stranded gas to gas hungry island of Java. However, the structural story (lack of gas supply) has recently been a bit of a doubled edge sword for gas. Its simply cannot secure any meaningful gas supply contract when demand is surging. LNG receiving terminals is a great solution but unfortunately still 3 years away. With the domestic consumption story taking off in Indonesia, PGAS will have limited operating leverage to benefit. Still great LT story at reasonable valuation but status quo (note we have not change our earnings forecast) means underperformance in the meantime. Patience required.
· PGas is a structural growth story of Indonesia’s shift to gas often marred with execution disappointments.
· We expect material new gas supply only in 2013 when LNG comes on-stream. There could be further delay on this as it will take 24-36months to complete the LNG project from date it’s commenced. Pgas has not signed any firm gas contract for LNG.
· We expect new contracts (piped and LNG receiving terminal to be signed in next six months but this does not mean actual gas supply will increase before 2012 as it takes time to monetize gas.
· We downgrade the stock to outperform in absence of any price and volume growth in foreseeable future. That said, we are not turning negative (although less positive) as the stock is cheap, trading at 10.7x 2011CL, with a solid balance sheet, 45% ROE, 22% ROA and 5.6% div yield.
· The stock should re-rate on progress of LNG receiving terminal and new volume contracts.
· PGas is a structural growth story of Indonesia’s shift to gas often marred with execution disappointments.
· We expect material new gas supply only in 2013 when LNG comes on-stream. There could be further delay on this as it will take 24-36months to complete the LNG project from date it’s commenced. Pgas has not signed any firm gas contract for LNG.
· We expect new contracts (piped and LNG receiving terminal to be signed in next six months but this does not mean actual gas supply will increase before 2012 as it takes time to monetize gas.
· We downgrade the stock to outperform in absence of any price and volume growth in foreseeable future. That said, we are not turning negative (although less positive) as the stock is cheap, trading at 10.7x 2011CL, with a solid balance sheet, 45% ROE, 22% ROA and 5.6% div yield.
· The stock should re-rate on progress of LNG receiving terminal and new volume contracts.
AAA Bank New LDR and RR Ratio, Paradox Spur Lending, Costing Margin
Higher RR will also play as the the tool for higher lending rate through the transmission of cost of fund formula (average deposits rate/1-RR). Higher lending rate means more expensive money to lend, thus lower loan growth. Hence the new regulation imposed by the central bank seems paradox in our view, because maintaining margin means higher lending rate thus lower demand of loan meanwhile the central bank demand banks to have LDR ratio at 78% - 100%.
± New RR from default 5% to 8%.
Bank of Indonesia on Friday (3/9) released new RR (required reserve) level from which set default of 5% to 8%, to hinder threat of inflation which already reached 6.44% yoy on August. At the same time, the central bank also regulate LDR level for banking industry at range 78% - 100%. For those banks with LDR below 78% will get penalty at default plus additional 0.1% RR for every 1% LDR difference below 78% and for those banks with LDR above 100%, will get penalty at default plus additional 0.2% for every 1% difference above 100%. However penalty would not be eligible if banks have minimum capital adequacy ratio at 14%. New rules will be effective on November 1, 2010.
± Spur Lending by Costing Profitability Margin
In the normal case, higher RR means higher deposits portion must be set asided by the banks into the central bank vault cash. That will lead to liquidity absorbtion which could hinder inflation. But at the same time, higher RR will also play as the the tool for higher lending rate through the transmission of cost of fund formula (average deposits rate/1-RR). Higher lending rate means more expensive money to lend, thus lower loan growth. Hence the new regulation imposed by the central bank seems paradox in our view, because maintaining margin means higher lending rate thus lower demand of loan meanwhile the central bank demand banks to have LDR ratio at 78% - 100%. In a quick take, the new rules can be translated as banks should spur lending by costing profitability margin
± BBNI Get Penalty, BBRI, BDMN, and BTPN Pass, BBCA on Threat
BBCA, BMRI, BBNI will be the least beneficiary under the new rules, since the three have LDR ratio in 2Q10 each at 51%, 66.2%, 68.2%. BBNI will be the only bank who hit by higher cost of fund and additional penalty of 1% at the same time, since its total CAR ratio was below the threshold level, 13.8%. Meanwhile BBCA and BMRI will be free from penalty since both the total CAR ratio were at 14.7% and 15.3%. BBCA will be on threat to get additional penalty on RR by about 2.7%, since the total CAR ratio is nearing the threshold. BBRI, BDMN and BTPN will be totally free from additional penalty on RR level since their LDR level was at range 78% - 100%.
± Banking Sector, Downgrade to Neutral from Outperform
Nevertheless the banks is given 2.5% interest on 8% RR, which could lessen the cost of fund, 2.5% however still gives negative spread compared to average deposits rate which currently vary from 6% up to 10%. Given the likelihood of banks will have lower profitability margin under the new rules, we rate banking sector from OUTPERFORM to NEUTRAL in 2011. In addition, since the regulation is more to promote lending, the rise of NPL is also on sight. Banks with disclipline cost of credit, low cost of fund structure, high ROE and high capital adequacy ratio still have rosy outlook. We prefer BBRI, BMRI and BBCA over BBNI and BDMN. BTPN Neutral.
± New RR from default 5% to 8%.
Bank of Indonesia on Friday (3/9) released new RR (required reserve) level from which set default of 5% to 8%, to hinder threat of inflation which already reached 6.44% yoy on August. At the same time, the central bank also regulate LDR level for banking industry at range 78% - 100%. For those banks with LDR below 78% will get penalty at default plus additional 0.1% RR for every 1% LDR difference below 78% and for those banks with LDR above 100%, will get penalty at default plus additional 0.2% for every 1% difference above 100%. However penalty would not be eligible if banks have minimum capital adequacy ratio at 14%. New rules will be effective on November 1, 2010.
± Spur Lending by Costing Profitability Margin
In the normal case, higher RR means higher deposits portion must be set asided by the banks into the central bank vault cash. That will lead to liquidity absorbtion which could hinder inflation. But at the same time, higher RR will also play as the the tool for higher lending rate through the transmission of cost of fund formula (average deposits rate/1-RR). Higher lending rate means more expensive money to lend, thus lower loan growth. Hence the new regulation imposed by the central bank seems paradox in our view, because maintaining margin means higher lending rate thus lower demand of loan meanwhile the central bank demand banks to have LDR ratio at 78% - 100%. In a quick take, the new rules can be translated as banks should spur lending by costing profitability margin
± BBNI Get Penalty, BBRI, BDMN, and BTPN Pass, BBCA on Threat
BBCA, BMRI, BBNI will be the least beneficiary under the new rules, since the three have LDR ratio in 2Q10 each at 51%, 66.2%, 68.2%. BBNI will be the only bank who hit by higher cost of fund and additional penalty of 1% at the same time, since its total CAR ratio was below the threshold level, 13.8%. Meanwhile BBCA and BMRI will be free from penalty since both the total CAR ratio were at 14.7% and 15.3%. BBCA will be on threat to get additional penalty on RR by about 2.7%, since the total CAR ratio is nearing the threshold. BBRI, BDMN and BTPN will be totally free from additional penalty on RR level since their LDR level was at range 78% - 100%.
± Banking Sector, Downgrade to Neutral from Outperform
Nevertheless the banks is given 2.5% interest on 8% RR, which could lessen the cost of fund, 2.5% however still gives negative spread compared to average deposits rate which currently vary from 6% up to 10%. Given the likelihood of banks will have lower profitability margin under the new rules, we rate banking sector from OUTPERFORM to NEUTRAL in 2011. In addition, since the regulation is more to promote lending, the rise of NPL is also on sight. Banks with disclipline cost of credit, low cost of fund structure, high ROE and high capital adequacy ratio still have rosy outlook. We prefer BBRI, BMRI and BBCA over BBNI and BDMN. BTPN Neutral.
BNP Paribas BANK- NEW RR: MANAGEABLE EARNINGS' REDUCTION...
BI is increasing its reserve requirement (RR) to 8% fr 5% effective 1 Nov to absorb excess liquidity (around IDR 50t/USD5,6b/3% of total IDR deposits) after inflation accelerated in the past 5 months. * BI opted to keep its benchmark rate at 6.5% and Raising RR is in line with the govt and central bank’s intention to favour GROWTH vs inflation. * Most impact on BBCA IJ (-6% of 2011 earnings), BBNI IJ (-5% of 2011 earnings) and BMRI (-3% of 20011 earnings). But other banks with the likes of BBTN, BNII BDMN, BBRI, BTPN & PNBN is only 2 to 3%. That said, Tjandra's TOP picks remain: Bank Negara (BBNI IJ) and Bank Danamon (BBNI IJ) which offers more upside compared to other banks in his view. * I personally think that BBRI also is an ATTRACTIVE alternative as the bank has shown improvemnent in NIM and one the least impacted re the new ruling in terms of earnings (-2%) and offers better liquidity as well in term of tradinmg point of view.. BUY BBRI. * Attached is the table of banks' earning vis-a-vis new RR rulings.
Mandiri Sekuritas Banking sector: RR up from 5% to 8%
Primary RR will be increased to 8%... Bank Indonesia will increase the minimum primary RR for banks from 5% previously to 8% which will be effective 1 Nov10. Yet, banks will obtain interest of 2.5% p.a for RR exceeding 5%. We foresee a margin erosion from this ruling as banks will forgo the yields previously earned from its placement in SBIs (estimated around 4%), leading to a decline in NIM by around 17-22 bps based on third party deposits (TPF) as of end Jun10. In addition to primary RR, banks still need to allocate secondary RR of 2.5% of third party deposits, but
unchanged from the previous ruling.
.. on top of that, additional RR for banks with LDR below 78%. But, that's not it. To spur loan growth, BI has determined the minimum LDR for banks to meet, i.e 78%. A penalty of 0.1 of TPF will be imposed for every 1 ppt below the targeted LDR. Three banks under our coverage will be negatively affected from this ruling: BMRI, BBCA and BBNI. Based on Jun10 position, BBCA will have to pay the highest penalty of 2.6% in additional RR, followed by BMRI of 1.1% and BBNI of 1.0%. Please bear in mind that this new ruling will apply starting 1 Mar11, so the impact might not be as high as projected if these banks increase their loans until end of Mar11.
.. and those exceeding 100%. To promote the implementation of prudent practices, Bank Indonesia will impose a penalty of 0.2 of TPF for every 1 ppt above the maximum LDR of 100% if the bank’s CAR is below 14%. For banks with CAR above 14%, there is no penalty imposed even though their LDR is exceeding 100%. There is no bank under our coverage will be negatively impacted from this requirement.
BBCA will be the worst affected. From our calculation, BBCA likely will be affected the hardest by this new ruling, while BBTN will be the least impacted. Yet, bear in mind that this calculation is based on Jun10 figures and assuming that banks don’t change their policy. We believe that lending rate will likely increase thus reducing the impact of margin pressure. At this juncture, we still maintain BBRI as our top pick and overweight stance on the sector.
unchanged from the previous ruling.
.. on top of that, additional RR for banks with LDR below 78%. But, that's not it. To spur loan growth, BI has determined the minimum LDR for banks to meet, i.e 78%. A penalty of 0.1 of TPF will be imposed for every 1 ppt below the targeted LDR. Three banks under our coverage will be negatively affected from this ruling: BMRI, BBCA and BBNI. Based on Jun10 position, BBCA will have to pay the highest penalty of 2.6% in additional RR, followed by BMRI of 1.1% and BBNI of 1.0%. Please bear in mind that this new ruling will apply starting 1 Mar11, so the impact might not be as high as projected if these banks increase their loans until end of Mar11.
.. and those exceeding 100%. To promote the implementation of prudent practices, Bank Indonesia will impose a penalty of 0.2 of TPF for every 1 ppt above the maximum LDR of 100% if the bank’s CAR is below 14%. For banks with CAR above 14%, there is no penalty imposed even though their LDR is exceeding 100%. There is no bank under our coverage will be negatively impacted from this requirement.
BBCA will be the worst affected. From our calculation, BBCA likely will be affected the hardest by this new ruling, while BBTN will be the least impacted. Yet, bear in mind that this calculation is based on Jun10 figures and assuming that banks don’t change their policy. We believe that lending rate will likely increase thus reducing the impact of margin pressure. At this juncture, we still maintain BBRI as our top pick and overweight stance on the sector.
Credis Suisse INDOSAT (ISAT): 2010 Guidance higher revenue/margins, lower capex- Buy
I reiterate this is TIME to BUY ISAT given 1) Since New CEO in August 2009, 4Q-1Q-3Q Cellular continued to grow from 16.9% 3Q09 to 18.0%-18.2%-18.7%, 2) 2Q outperformance in term of growing QoQ Cellular Growth to back to #2 Operator with EBITDA margins growth, 3) NEW FY10 Management guidance, there is room for earnings upgrade, and 4) share price underperformance YTD and in the past 5 years! At Rp4,450- ISAT is trading on 15.9x-12.5x 2010F-11F, 4.8% 2011F Dividend Yield, and implying 60% upside to DCF Rp7,100 (implies 20x 2011F PER), we reiterate BUY ISAT!
· Colin McCallum (Daily attached): Indosat has finally released official guidance for FY10. Lack of guidance has arguably placed Indosat at a disadvantage in terms of investor “mind-share” in Indonesia, and has been misconstrued as a lack of control over the business by new management. Indosat’s FY10 guidance, just released, is for 16-17% cellular revenue growth, a 12-14% drop in non-wireless revenues, 48-49% EBITDA margins and capex of Rp8.5-9.0 tn. The only previous guidance released by management, on 11 May 2010, was for cash capex of Rp9.1-10.9 tn.
· We would reiterate that Indosat’s cellular revenue grew 7.7% QoQ into 2Q10, faster than Excelcom, which grew service revenue by 4.2% QoQ and Telkomsel (not listed) which grew revenue 5.7% QoQ into 2Q10. It seems hard to deny that implied 17.0% and 10.0% YoY cellular and total revenue growth figures, implied YoY EBITDA growth of circa 12.9%, and capex 20.4% lower YoY, all represent improving trends. Our OUTPERFORM rating is maintained.
· Colin McCallum (Daily attached): Indosat has finally released official guidance for FY10. Lack of guidance has arguably placed Indosat at a disadvantage in terms of investor “mind-share” in Indonesia, and has been misconstrued as a lack of control over the business by new management. Indosat’s FY10 guidance, just released, is for 16-17% cellular revenue growth, a 12-14% drop in non-wireless revenues, 48-49% EBITDA margins and capex of Rp8.5-9.0 tn. The only previous guidance released by management, on 11 May 2010, was for cash capex of Rp9.1-10.9 tn.
· We would reiterate that Indosat’s cellular revenue grew 7.7% QoQ into 2Q10, faster than Excelcom, which grew service revenue by 4.2% QoQ and Telkomsel (not listed) which grew revenue 5.7% QoQ into 2Q10. It seems hard to deny that implied 17.0% and 10.0% YoY cellular and total revenue growth figures, implied YoY EBITDA growth of circa 12.9%, and capex 20.4% lower YoY, all represent improving trends. Our OUTPERFORM rating is maintained.
Danareksa Indofood Sukses Makmur (INDF IJ, Rp4,475 BUY) A new future
BUY, TP of Rp5,100
We have raised our 2010F EPS estimates by 24% to take into account: 1) the stronger pricing power and 2) the firmer rupiah exchange rate which ultimately leads to better margins. Stronger pricing power is evident in the company’s decision to hike noodle prices by Rp50/pack in early Aug. While, a record-high gross margin should provide a buffer against increasing input cost pressures in 2H10. Also worth to note, imminent ICBP listing indicates a premium valuation (around 17-21x P/E10F and 15-19x P/E11F) – or above the current valuations for Indofood and the consumer sector. Yet, any upside from the IPO should lead to greater value for Indofood. All in all, we remain upbeat on the stock given its defensive attributes, meaning that the company should benefit from both burgeoning domestic consumption and commodity price recovery. BUY maintained with a TP of Rp5,100/share, implying 17.1-15.9x P/E10-11F.
Best year for noodles since 2003
Despite mounting raw material cost pressures – particularly wheat – we believe Indofood can sustain the noodles operating margin at around 14% this year. The company has already hiked noodle selling prices by Rp50/pack in early Aug 2010 – about a 4% price increase. This more than offsets the 7% ytd increase in the wheat price that currently hovers around US$6.3/bushel. A rough calculation suggests that the company needs to raise selling prices by around 3% for every 10% increase in the wheat price to maintain its margins. Hence, if the average wheat price surpasses US$5/bushel, Indofood will have to make further price hikes – else the 1Q11 margin will be sacrificed. Note also that we align our average exchange rate assumption with our economists’ estimate, reflecting the stronger rupiah. This, coupled with the company’s stronger pricing power, bodes well for Indofood’s non-agri business.
Stronger contribution from agribusiness
Many parts of Indonesia have experienced poor weather conditions this year. As a result, inflation may exceed 6% in 2010, in our view, since the bad weather - which has raised supply concerns - is forecast to persist. This may mean higher input prices. As such, margins may be lower in the non-agri division: we forecast 13.0-11.5% EBIT margins in FY11F for the noodles and flour segments, respectively. Overall, the EBIT contribution from the CBP division is expected to decline to 35% in FY11F from 40% this year. On the flip side, however, Indofood’s agribusiness division stands to make a stronger contribution – due to firm CPO prices - and we believe this division will contribute around 35% of EBIT, or up from 30% in FY10F.
What’s next after the ICBP listing?
Well, we think ICBP will leverage further - be it for organic expansion or to make acquisitions. Note that its balance sheet is strong with a net cash position of around Rp140bn, after paying down the shareholder loan. Therefore, ICBP will have greater flexibility compared to its holding in raising more debts. With a debt covenant of 3x debt-to-EBITDA ratio, Indofood could only add another Rp4tn debt, while ICBP could raise as much as Rp8tn or twice of Indofood. Factoring this, ICBP has a huge opportunity to acquire new business in order to create more synergy, a beverage company perhaps.
We have raised our 2010F EPS estimates by 24% to take into account: 1) the stronger pricing power and 2) the firmer rupiah exchange rate which ultimately leads to better margins. Stronger pricing power is evident in the company’s decision to hike noodle prices by Rp50/pack in early Aug. While, a record-high gross margin should provide a buffer against increasing input cost pressures in 2H10. Also worth to note, imminent ICBP listing indicates a premium valuation (around 17-21x P/E10F and 15-19x P/E11F) – or above the current valuations for Indofood and the consumer sector. Yet, any upside from the IPO should lead to greater value for Indofood. All in all, we remain upbeat on the stock given its defensive attributes, meaning that the company should benefit from both burgeoning domestic consumption and commodity price recovery. BUY maintained with a TP of Rp5,100/share, implying 17.1-15.9x P/E10-11F.
Best year for noodles since 2003
Despite mounting raw material cost pressures – particularly wheat – we believe Indofood can sustain the noodles operating margin at around 14% this year. The company has already hiked noodle selling prices by Rp50/pack in early Aug 2010 – about a 4% price increase. This more than offsets the 7% ytd increase in the wheat price that currently hovers around US$6.3/bushel. A rough calculation suggests that the company needs to raise selling prices by around 3% for every 10% increase in the wheat price to maintain its margins. Hence, if the average wheat price surpasses US$5/bushel, Indofood will have to make further price hikes – else the 1Q11 margin will be sacrificed. Note also that we align our average exchange rate assumption with our economists’ estimate, reflecting the stronger rupiah. This, coupled with the company’s stronger pricing power, bodes well for Indofood’s non-agri business.
Stronger contribution from agribusiness
Many parts of Indonesia have experienced poor weather conditions this year. As a result, inflation may exceed 6% in 2010, in our view, since the bad weather - which has raised supply concerns - is forecast to persist. This may mean higher input prices. As such, margins may be lower in the non-agri division: we forecast 13.0-11.5% EBIT margins in FY11F for the noodles and flour segments, respectively. Overall, the EBIT contribution from the CBP division is expected to decline to 35% in FY11F from 40% this year. On the flip side, however, Indofood’s agribusiness division stands to make a stronger contribution – due to firm CPO prices - and we believe this division will contribute around 35% of EBIT, or up from 30% in FY10F.
What’s next after the ICBP listing?
Well, we think ICBP will leverage further - be it for organic expansion or to make acquisitions. Note that its balance sheet is strong with a net cash position of around Rp140bn, after paying down the shareholder loan. Therefore, ICBP will have greater flexibility compared to its holding in raising more debts. With a debt covenant of 3x debt-to-EBITDA ratio, Indofood could only add another Rp4tn debt, while ICBP could raise as much as Rp8tn or twice of Indofood. Factoring this, ICBP has a huge opportunity to acquire new business in order to create more synergy, a beverage company perhaps.
AAA PT Timah Tbk Too many “x” factors...
± 1H10 net income below expectations
Timah reported 1H10 net profit of Rp 322.2 (+653% yoy, +27% qoq), which is below our expectations and consensus. It only accounts for 35% our FY10 estimates and 30% consensus. Revenue was up to Rp 3,749 bn (+6% yoy, +4% qoq) mainly come from higher ASP of US$ 17,529/ton, which surged 45% yoy. 1H10 refined tin production only slightly increased by 0.6% to 19,502 tons, which off shore production up 28% yoy in 1H10 to 9,085 tons Sn. But sales volumes of 19,760 tons which only account 40% our full year target of 48-49k tons. Historically, 1H sales volumes contributed 45%-50% FY target.
± Unexpectedly weak 2Q10 results
On QoQ basis, we find peculiarly results. Amid stronger ASP of US$ 17,959/ton, up 6% qoq, and higher off shore production of 6,959 tons vs 3,262 tons in land production, Timah reported lower margin due to higher cost production. Management states that inland production cost increased unexpectedly above 70% of LME price vs internal expectation of 60% when LME tin price above US$ 15,000/ton (probably relates to anticipation of new mining law) and maintenance cost for old BLDs also surged significantly. As a result, 2Q10 margin plummeted to only US$ 1,465/ton, down 55% qoq.
± Revisit model, revise down earnings forecasts
Historically, Timah’s earnings oftenly below expectations and downward revision to consensus earnings oftenly to occur. We revisit our cost structure conservatively since there are many “x” factors that oftenly unexpected and unjustified. Tin solder is still on market penetration and unlikely to be commercially sold this year. Timah finds is difficult to enter the market because there are already established tin solder factories that vertically integrated with electronic producers. Positive catalyst comes from LME price, supported by lower LME stocks that have fallen 47%ytd. Based on our new revised key assumptions (see figure 2), we cut FY10 and FY11 earnings forecast by 28% and 25% to Rp 663 bn and Rp 875 bn, respectively.
± Pricing In – Lower TP - Downgrade to HOLD
Based on our revisited model and lower WACC of 13.9% (from 14.3% previously due to lower Rf of 9%), we derive new TP of Rp 2,300 per share. Our TP implies at 17.5x-13.2 P/EFY10F-11F and 8.1x-6.5x EV/EBITDA FY11F, with potential downside of 5.2%. Timah is not cheap anymore based on our new forecasts. We downgrade our BUY rating to HOLD. Key downside risks are: 1.) tin price volatility, 2.)higher mining cost, and 3.)lower sales volume.
Timah reported 1H10 net profit of Rp 322.2 (+653% yoy, +27% qoq), which is below our expectations and consensus. It only accounts for 35% our FY10 estimates and 30% consensus. Revenue was up to Rp 3,749 bn (+6% yoy, +4% qoq) mainly come from higher ASP of US$ 17,529/ton, which surged 45% yoy. 1H10 refined tin production only slightly increased by 0.6% to 19,502 tons, which off shore production up 28% yoy in 1H10 to 9,085 tons Sn. But sales volumes of 19,760 tons which only account 40% our full year target of 48-49k tons. Historically, 1H sales volumes contributed 45%-50% FY target.
± Unexpectedly weak 2Q10 results
On QoQ basis, we find peculiarly results. Amid stronger ASP of US$ 17,959/ton, up 6% qoq, and higher off shore production of 6,959 tons vs 3,262 tons in land production, Timah reported lower margin due to higher cost production. Management states that inland production cost increased unexpectedly above 70% of LME price vs internal expectation of 60% when LME tin price above US$ 15,000/ton (probably relates to anticipation of new mining law) and maintenance cost for old BLDs also surged significantly. As a result, 2Q10 margin plummeted to only US$ 1,465/ton, down 55% qoq.
± Revisit model, revise down earnings forecasts
Historically, Timah’s earnings oftenly below expectations and downward revision to consensus earnings oftenly to occur. We revisit our cost structure conservatively since there are many “x” factors that oftenly unexpected and unjustified. Tin solder is still on market penetration and unlikely to be commercially sold this year. Timah finds is difficult to enter the market because there are already established tin solder factories that vertically integrated with electronic producers. Positive catalyst comes from LME price, supported by lower LME stocks that have fallen 47%ytd. Based on our new revised key assumptions (see figure 2), we cut FY10 and FY11 earnings forecast by 28% and 25% to Rp 663 bn and Rp 875 bn, respectively.
± Pricing In – Lower TP - Downgrade to HOLD
Based on our revisited model and lower WACC of 13.9% (from 14.3% previously due to lower Rf of 9%), we derive new TP of Rp 2,300 per share. Our TP implies at 17.5x-13.2 P/EFY10F-11F and 8.1x-6.5x EV/EBITDA FY11F, with potential downside of 5.2%. Timah is not cheap anymore based on our new forecasts. We downgrade our BUY rating to HOLD. Key downside risks are: 1.) tin price volatility, 2.)higher mining cost, and 3.)lower sales volume.
Indopremier PTPP Superior Profitability and RoE
PTPP profitability has soared gradually during 2005-2009 and recorded superior profitability in 2008-2009, thanks to its cost efficiency program. Meanwhile, improving cash collection capability and the additional of authorized capital has resulted in abundant cash and lowered leverage ratio during the same periods. Currently, the stock is traded at 10.09x-3.22x PE-PBV FY11F which is still attractive and eligible to conducted premium valuation, given its superior profitability and RoE. Hence, we initiate PTPP coverage on BUY rating with fair value at Rp 1,000 per share based on DCF-methods.
A long journey
Established under the name of NV Pembangunan Perumahan in 1953, which was intended to build houses for the functionaries of PT Semen Gresik (Persero) Tbk, a BAPINDO’s subsidiary. On its development, PTPP is engaged in two business activities, i.e.: construction services and strategic investments. Currently, PTPP was the third largest state-owned construction company in Indonesia which controls 3.7% market share.
An added value: Go Green concept
PTPP is the first pioneers in Indonesia construction service who has an initiative to develop the concept of “Go Green” in its several construction projects which could recycle water usage and saving energy consumption. The contribution of PTPP “Go Green” project is still relative small to the total revenue. We believe that the company will be benefited by its "Go Green" initiative due to the Green concept will become more popular in the future, in order to reducing the effect of global warming.
Recorded superior profitability
PTPP’s profitability has increased gradually during 2005-2009, supported by the success of management in implementing the policy of cost efficiency. The ratios of cost/total revenue have been maintained well and relative tend to decline, thus resulted in superior profitability in 2008 and 2009 which were higher compared to the industry. Meanwhile, the company’s efficiency program has bringing in superior profitability in 1H10 which was compared to 1H09 periods, but the figures was below the industry due to the delayed projects and higher opex/revenue ratio.
Better cash collection, better liquidity ratio
PTPP managed to generate more cash hence enhancing liquidity. The balance of cash and cash equivalent has surged significantly by 109% p.a. CAGR from Rp 23 billion in 2005 became Rp 446 billion in 2009, thanks to better cash collection capability. The company receivable turnover has become better and achieved its best level in 2009. Moreover, leverage ratio is also getting better, which was also supported by an equity increase and the additional of PTPP authorized capital. Meanwhile, the IPO proceeds have filled PTPP’s pockets with abundant cash in 1H10. The issuance of 1.04 billion new shares at Rp 560 per share has generated cash proceeds of Rp 566.06 billion which will be utilized to finance working capital (41%) and investment in construction project (59%).
Financial Forecast in brief
Learned from the global financial crisis and to mitigate the risk of defaulted project payment, PTPP is still going to be focus on government projects for the year 2010-2011 which will contribute 80% to the company’s project portfolio. Underpinned by lower interest rate, an enthusiastic property sector, the continuation of infrastructure’s investments as well as the realization of delayed government spending, we forecast that the company’s revenue and net profit will grow by 55.0% YoY-30.3% YoY and 84.1% YoY-29.3% YoY in FY10-FY11, respectively. Meanwhile, PTPP profitability are projected well-maintained backed by the company’s cost efficiency.
Initiating coverage with BUY rating
By using 11.84% WACC assumption, 2011 as basic year and 3% terminal growth in DCF-method calculation, we obtained PTPP’s fair value at Rp 1,000 per share. Currently, the share price is traded at 10.09x-3.22x PE-PBV FY11F. We view that the counter is remain attractive and eligible conducted premium valuation, on the back of superior in profitability and RoE. Hence, we initiate PTPP coverage with BUY rating since our fair value offers 23% upside potential.
A long journey
Established under the name of NV Pembangunan Perumahan in 1953, which was intended to build houses for the functionaries of PT Semen Gresik (Persero) Tbk, a BAPINDO’s subsidiary. On its development, PTPP is engaged in two business activities, i.e.: construction services and strategic investments. Currently, PTPP was the third largest state-owned construction company in Indonesia which controls 3.7% market share.
An added value: Go Green concept
PTPP is the first pioneers in Indonesia construction service who has an initiative to develop the concept of “Go Green” in its several construction projects which could recycle water usage and saving energy consumption. The contribution of PTPP “Go Green” project is still relative small to the total revenue. We believe that the company will be benefited by its "Go Green" initiative due to the Green concept will become more popular in the future, in order to reducing the effect of global warming.
Recorded superior profitability
PTPP’s profitability has increased gradually during 2005-2009, supported by the success of management in implementing the policy of cost efficiency. The ratios of cost/total revenue have been maintained well and relative tend to decline, thus resulted in superior profitability in 2008 and 2009 which were higher compared to the industry. Meanwhile, the company’s efficiency program has bringing in superior profitability in 1H10 which was compared to 1H09 periods, but the figures was below the industry due to the delayed projects and higher opex/revenue ratio.
Better cash collection, better liquidity ratio
PTPP managed to generate more cash hence enhancing liquidity. The balance of cash and cash equivalent has surged significantly by 109% p.a. CAGR from Rp 23 billion in 2005 became Rp 446 billion in 2009, thanks to better cash collection capability. The company receivable turnover has become better and achieved its best level in 2009. Moreover, leverage ratio is also getting better, which was also supported by an equity increase and the additional of PTPP authorized capital. Meanwhile, the IPO proceeds have filled PTPP’s pockets with abundant cash in 1H10. The issuance of 1.04 billion new shares at Rp 560 per share has generated cash proceeds of Rp 566.06 billion which will be utilized to finance working capital (41%) and investment in construction project (59%).
Financial Forecast in brief
Learned from the global financial crisis and to mitigate the risk of defaulted project payment, PTPP is still going to be focus on government projects for the year 2010-2011 which will contribute 80% to the company’s project portfolio. Underpinned by lower interest rate, an enthusiastic property sector, the continuation of infrastructure’s investments as well as the realization of delayed government spending, we forecast that the company’s revenue and net profit will grow by 55.0% YoY-30.3% YoY and 84.1% YoY-29.3% YoY in FY10-FY11, respectively. Meanwhile, PTPP profitability are projected well-maintained backed by the company’s cost efficiency.
Initiating coverage with BUY rating
By using 11.84% WACC assumption, 2011 as basic year and 3% terminal growth in DCF-method calculation, we obtained PTPP’s fair value at Rp 1,000 per share. Currently, the share price is traded at 10.09x-3.22x PE-PBV FY11F. We view that the counter is remain attractive and eligible conducted premium valuation, on the back of superior in profitability and RoE. Hence, we initiate PTPP coverage with BUY rating since our fair value offers 23% upside potential.
CLSA Stronger Rupiah, BUY consumers
It certainly feels like we are in the midst of a consumer frenzy. Consumer stocks were in general well bid yesterday. Cigarette maker Gudang Garam (GGRM IJ) and our favorite biskuit maker Mayora (MYOR IJ) are at record highs. Both names are our top picks in the consumer sector.
High end retailer Mitra Adi (MAPI IJ) +5.3%, media company Surya Citra (SCMA IJ) +4.4%. Suzuki and Nissan car distributor Indomobil (IMAS IJ) +24%, trading limit up in the last three trading sessions. Granted most of these stocks are not very liquid, but still highlight strong interest in Indo consumer space.
With the recent strong performance, the question is whether it is time to trim domestic stocks. Nick Cashmore does not think so. Central bank intervention has its limits and Indonesia’s high nominal interest rate structure will prove a strong lure, driving down long bond yields. Our chief economist Eric Fishwick has changed his assumption of US rates and now expects interest rates will not increase before mid 2012. This makes Indo high interest rates even more attractive.
In his latest GREED & fear, Chris Wood noted that it is interesting to hear from an Asian perspective that there is now a growing interest investing in rupiah fixed income products given the relatively attractive yields, the recent stability of the rupiah, and Indonesia’s strong fiscal position.
Japanese investment trusts have already invested Y73.7bn in Indonesian bonds. But more flows are likely to follow given that Japanese investment trusts have already invested Y1.84tn in Brazilian bonds where the attraction is again high yields and a strong currency. Such flows can only be a positive for maintaining momentum behind the Indonesian story.
Indonesia’s new central bank governor Darmin Nasution has vowed to lower inflation. A stronger rupiah would certainly help. A sustained rise in the value of the rupiah would improve consumer purchasing power and boost living standards.
High end retailer Mitra Adi (MAPI IJ) +5.3%, media company Surya Citra (SCMA IJ) +4.4%. Suzuki and Nissan car distributor Indomobil (IMAS IJ) +24%, trading limit up in the last three trading sessions. Granted most of these stocks are not very liquid, but still highlight strong interest in Indo consumer space.
With the recent strong performance, the question is whether it is time to trim domestic stocks. Nick Cashmore does not think so. Central bank intervention has its limits and Indonesia’s high nominal interest rate structure will prove a strong lure, driving down long bond yields. Our chief economist Eric Fishwick has changed his assumption of US rates and now expects interest rates will not increase before mid 2012. This makes Indo high interest rates even more attractive.
In his latest GREED & fear, Chris Wood noted that it is interesting to hear from an Asian perspective that there is now a growing interest investing in rupiah fixed income products given the relatively attractive yields, the recent stability of the rupiah, and Indonesia’s strong fiscal position.
Japanese investment trusts have already invested Y73.7bn in Indonesian bonds. But more flows are likely to follow given that Japanese investment trusts have already invested Y1.84tn in Brazilian bonds where the attraction is again high yields and a strong currency. Such flows can only be a positive for maintaining momentum behind the Indonesian story.
Indonesia’s new central bank governor Darmin Nasution has vowed to lower inflation. A stronger rupiah would certainly help. A sustained rise in the value of the rupiah would improve consumer purchasing power and boost living standards.
Mandiri Sekuritas Energi Mega Persada: Signed gas agreement at US$4.9/mmbtu (ENRG, Rp88, Buy, TP: Rp200)
The company reported that its Malacca Strait asset has signed a gas sales agreement (GSA) with BOB PT BSP – Pertamina Hulu Energi. ENRG is expected to sell 9mmsfcd to BOB at a price of US$4.9/mmbtu (with an escalation term of 3% per annum) from 2H12 to 2020. Total contracted volume of gas within the agreement is 25bcf of gas.
Note that up to 1H10, Malacca Strait produces around 11.9mmscfd, in which 4.5mmscfd is flared, while the remaining is used as fuel for the company’s pump and power generator.
We view this contract will give a positive impact to company as no more gas would be flared in such asset, and the contracted gas selling price will boost current average gas selling price of only US$2.5/mmbtu. Note that volume for such agreement reflected around 15.5% of FY10F daily gas production of 58mmscfd.
Note that up to 1H10, Malacca Strait produces around 11.9mmscfd, in which 4.5mmscfd is flared, while the remaining is used as fuel for the company’s pump and power generator.
We view this contract will give a positive impact to company as no more gas would be flared in such asset, and the contracted gas selling price will boost current average gas selling price of only US$2.5/mmbtu. Note that volume for such agreement reflected around 15.5% of FY10F daily gas production of 58mmscfd.
Mandiri Sekuritas KIJA : Ministry of Transportation to follow up railway connection construction on Cikarang Dry Port (KIJA, Rp115, Buy, TP idr 265)
Following Hatta Rajasa, the coordinating minister for the economy, suggestion earlier this week, on the urge to construct railway connection on Cikarang Dry Port to Tanjung Priok, the Ministry of Transportation followed up with asking PT Kereta Api (KA) to imply the same proposal as this purposed to accelerate container deliverables which currently accommodated through road way. The government expects the construction to be completed within 3 months.
The construction is believed will give positive impact to KIJA as the owner of Cikarang Dry Port. Cikarang Dry Port serves as an extension of Tanjung Priok, located on 10ha area of land with 150k TEUs capacity, extendable up to 150ha. Upon reaching TEUs of 276k throughput units by 2012, net income contribution from the dryport is expected to be about US$5mn/year. Note that our TP of Rp265 excludes any contribution from the dry port which we see as an additional catalyst in the 2-3 years. We maintain buy, trading at 75% discount to NAV10.
The construction is believed will give positive impact to KIJA as the owner of Cikarang Dry Port. Cikarang Dry Port serves as an extension of Tanjung Priok, located on 10ha area of land with 150k TEUs capacity, extendable up to 150ha. Upon reaching TEUs of 276k throughput units by 2012, net income contribution from the dryport is expected to be about US$5mn/year. Note that our TP of Rp265 excludes any contribution from the dry port which we see as an additional catalyst in the 2-3 years. We maintain buy, trading at 75% discount to NAV10.
NISP Akra to add 33 new fuel stations (AKRA, Rp1,230)
· Aneka Kimia Raya Corporindo won a public service obligation tender held by BPH Migas to 32.7mn kl fuel. The company itself will distribute as much as 103,000 kl and plans to add 33 fuel stations until the end of this year.
· The new stations will be located nation wide. AKRA will use its internal cash to fund the construction. It is estimated one station costs between Rp700mn to Rp3bn or total Rp23.1-Rp99.0bn. AKRA currently has Rp548.0bn in cash, which is more than enough to finance this project.
· Revenue from the new stations will start to contribute next year. The fuel distribution business is expected to contribute 70.0% of AKRA revenue.
· AKRA is trading at 2011F consensus PER of 10.5x and EV/EBITDA of 6.9x.
· The new stations will be located nation wide. AKRA will use its internal cash to fund the construction. It is estimated one station costs between Rp700mn to Rp3bn or total Rp23.1-Rp99.0bn. AKRA currently has Rp548.0bn in cash, which is more than enough to finance this project.
· Revenue from the new stations will start to contribute next year. The fuel distribution business is expected to contribute 70.0% of AKRA revenue.
· AKRA is trading at 2011F consensus PER of 10.5x and EV/EBITDA of 6.9x.
NISP Perusahaan Gas Negara sets 2011F capex at US$600mn (PGAS, Rp3,900)
· Perusahaan Gas Negara is budgeting US$600mn or Rp5.58tn for capex in 2011. This is almost 3 times of the capex this year, which ranges between US$200-250mn.
· PGN CEO, Mr.Hendi Prio Santoso, states that the budget includes acquisition cost for an oil and gas block of US$350mn in response to the growing demand. In addition the company will acquire a gas tank costing US$50mn.
· Capex will 30% be financed from internal cash. The company has currently Rp9.53tn in cash. The balance will be sourced externally however no details have been shared.
· PGAS is trading at 2011F PER of 12.3x and EV/EBITDA of 7.4x.
· PGN CEO, Mr.Hendi Prio Santoso, states that the budget includes acquisition cost for an oil and gas block of US$350mn in response to the growing demand. In addition the company will acquire a gas tank costing US$50mn.
· Capex will 30% be financed from internal cash. The company has currently Rp9.53tn in cash. The balance will be sourced externally however no details have been shared.
· PGAS is trading at 2011F PER of 12.3x and EV/EBITDA of 7.4x.
NISP Indo Tambangraya Megah sold at Rp36,150 (ITMG, Rp37,100, Hold)
· Banpu Mineral sold 8.72% of ownership in ITM, raising Rp3.56tn or equal to Rp36,150/share. The figure is disappointing as it stood at the lowest range on its offering range at Rp36,150 – Rp38,500 per share.
· The transaction is settled yesterday and ITM cited that buyer is an institutional investor without collaborating more on this.
· As the proceeds were paid to Banpu Mineral and the amount also has no impact on control, as such, there is no impact on the company’s commitment and also cash position.
· Currently, ITMG is trading at 2011F PER of 12.8x and EV/EBITDA of 7.6x, Hold.
· The transaction is settled yesterday and ITM cited that buyer is an institutional investor without collaborating more on this.
· As the proceeds were paid to Banpu Mineral and the amount also has no impact on control, as such, there is no impact on the company’s commitment and also cash position.
· Currently, ITMG is trading at 2011F PER of 12.8x and EV/EBITDA of 7.6x, Hold.
NISP Adaro aims to acquire Bhakti Energy Persada (ADRO, Rp1,790, Buy)
· Adaro is currently eyeing to acquire Bhakti Energi Persada (BEP), a coal company that operates two mines with total coal reserve of 115.6mn tons. BEP is an active mine as it has commenced coal mining activity last year. Annual coal production for 2010F is estimated at 700k tons with 2011F target of 2mn tons.
· BEP requires US$400mn to boost its production next year; however, the company has not managed to obtain such funding.
· Adaro foresees it would not meet any obstacles in this transaction as BEP is owned by, Benny Subianto and T.P. Rachmat, which is also the owner of Adaro. Nevertheless, this transaction will be categorized as an affiliated transaction.
· Adaro will employ its internal cash to finance this acquisition as the company cash position stood at Rp5.3tn as of 1H10.
· We still wait for Adaro to update the rationale as the reserve in BEP is relatively small compared to Adaro’s 930mn reserves. Also, whether the proceeds will be injected in BEP or paid to the existing shareholders.
· Separately, Adaro’s share price posted a huge decline in the last few days amid two factors, which are 1) weak 1H10 bottom line and 2) rumors on placement at Rp1,500 – Rp1,750. We view that the second factor has a largest role in the decline; however, the company’s IR confirmed that there are no such plan for Adaro. On weak 1H10 bottom line, we view that this was largely due to higher effective tax rate and Rp127.3bn of forex loss in 2Q10.
· The company has a potential of posting a better performance in 2H10 due to stable mining activities as the planned stripping ratio is scheduled to be unchanged compared to a QoQ increase in 2Q10.
· Thus, recent hefty correction opens a cheaper entry to ADRO as it is currently trading at 2011F PER of 10.5x and EV/EBITDA of 4.9x, Buy.
· BEP requires US$400mn to boost its production next year; however, the company has not managed to obtain such funding.
· Adaro foresees it would not meet any obstacles in this transaction as BEP is owned by, Benny Subianto and T.P. Rachmat, which is also the owner of Adaro. Nevertheless, this transaction will be categorized as an affiliated transaction.
· Adaro will employ its internal cash to finance this acquisition as the company cash position stood at Rp5.3tn as of 1H10.
· We still wait for Adaro to update the rationale as the reserve in BEP is relatively small compared to Adaro’s 930mn reserves. Also, whether the proceeds will be injected in BEP or paid to the existing shareholders.
· Separately, Adaro’s share price posted a huge decline in the last few days amid two factors, which are 1) weak 1H10 bottom line and 2) rumors on placement at Rp1,500 – Rp1,750. We view that the second factor has a largest role in the decline; however, the company’s IR confirmed that there are no such plan for Adaro. On weak 1H10 bottom line, we view that this was largely due to higher effective tax rate and Rp127.3bn of forex loss in 2Q10.
· The company has a potential of posting a better performance in 2H10 due to stable mining activities as the planned stripping ratio is scheduled to be unchanged compared to a QoQ increase in 2Q10.
· Thus, recent hefty correction opens a cheaper entry to ADRO as it is currently trading at 2011F PER of 10.5x and EV/EBITDA of 4.9x, Buy.
Credis Suisse Bakrie Telecom - 2Q10 results: Bakrie has lost revenue market share
● Bakrie Telecom reported an 8.0% QoQ and 2.6% YoY decline in gross service revenue in 2Q10, while net service revenue declined by 5.7% QoQ and 0.6% YoY.
● We note that among the ‘big 3’ GSM cellular players Indosat delivered 7.7% QoQ growth into 2Q10, Telkomsel (Not listed) delivered 5.7% QoQ growth and Excelcom delivered 4.2% QoQ growth. Bakrie Telecom has lost revenue market share both QoQ
and YoY.
● Bakrie Telecom’s net EBITDA margin improved slightly (0.4 p.p.) QoQ to 52.7% in 2Q10 from 52.3% in 1Q10. This was due to a 41.7% QoQ decline in sales and marketing expenses. However, the 2Q10 EBITDA margin was much lower than 57.1% reported in 2Q09 as operating, G&A, and personnel expenses increased. Lower EBITDA, together with a sharp increase in interest expenses resulted in a net loss of Rp31 bn for Bakrie in 2Q10.
● We remain RESTRICTED on Bakrie Telecom.
● We note that among the ‘big 3’ GSM cellular players Indosat delivered 7.7% QoQ growth into 2Q10, Telkomsel (Not listed) delivered 5.7% QoQ growth and Excelcom delivered 4.2% QoQ growth. Bakrie Telecom has lost revenue market share both QoQ
and YoY.
● Bakrie Telecom’s net EBITDA margin improved slightly (0.4 p.p.) QoQ to 52.7% in 2Q10 from 52.3% in 1Q10. This was due to a 41.7% QoQ decline in sales and marketing expenses. However, the 2Q10 EBITDA margin was much lower than 57.1% reported in 2Q09 as operating, G&A, and personnel expenses increased. Lower EBITDA, together with a sharp increase in interest expenses resulted in a net loss of Rp31 bn for Bakrie in 2Q10.
● We remain RESTRICTED on Bakrie Telecom.
Deutsche United Tractors - Stronger heavy equipment sales, but clouded by heavy rains
Strong heavy equipment demand outlook
We have increased our heavy equipment sales forecasts by 9% to 5,500 units in 2010F, 6% to 6,050 units in 2011F and 2% to 6,655 units in 2012F to reflect buoyant coal price and improved demand from forestry sector amid industrial forest development especially in the light of de-forestation moratorium. Meanwhile, unfavorable weather continues in 3Q10 affecting the mining contracting rather than heavy equipment demand. As a result, we have lowered our coal delivery forecasts by 4% to 78mn tons in 2010F and 2% to 88mn tons in 2011F.
Reiterate Buy rating with target price of Rp22,300 (from Rp22,250)
The stock is attractive at 12.6x earnings in 2011F supported by exciting earnings prospect - delivering a 23% p.a. EBIT growth in the next two years - given buoyant commodity prices. Additionally, we believe operating performance and profitability weakness at the Mining Contracting division is only temporary awaiting weather improvement.
We have a new TP of Rp22,300 (from Rp22,250) to reflect greater heavy equipment sales, which is offset by Rupiah appreciation and weaker mining contracting's performance due to heavy rains. Our TP is based on a 10-year DCF valuation assuming a WACC of 15.9% (unchanged) - a risk free rate of 10.8% (unchanged), risk premium of 5.3%(unchanged), cost-of-debt of 2.1% (from 2.2%), equity to capital employed of 100% (unchanged), a terminal growth rate of 5% (unchanged - half of United Tractors' long-term FCF growth rate) and beta of 0.96 (unchanged).
We have increased our heavy equipment sales forecasts by 9% to 5,500 units in 2010F, 6% to 6,050 units in 2011F and 2% to 6,655 units in 2012F to reflect buoyant coal price and improved demand from forestry sector amid industrial forest development especially in the light of de-forestation moratorium. Meanwhile, unfavorable weather continues in 3Q10 affecting the mining contracting rather than heavy equipment demand. As a result, we have lowered our coal delivery forecasts by 4% to 78mn tons in 2010F and 2% to 88mn tons in 2011F.
Reiterate Buy rating with target price of Rp22,300 (from Rp22,250)
The stock is attractive at 12.6x earnings in 2011F supported by exciting earnings prospect - delivering a 23% p.a. EBIT growth in the next two years - given buoyant commodity prices. Additionally, we believe operating performance and profitability weakness at the Mining Contracting division is only temporary awaiting weather improvement.
We have a new TP of Rp22,300 (from Rp22,250) to reflect greater heavy equipment sales, which is offset by Rupiah appreciation and weaker mining contracting's performance due to heavy rains. Our TP is based on a 10-year DCF valuation assuming a WACC of 15.9% (unchanged) - a risk free rate of 10.8% (unchanged), risk premium of 5.3%(unchanged), cost-of-debt of 2.1% (from 2.2%), equity to capital employed of 100% (unchanged), a terminal growth rate of 5% (unchanged - half of United Tractors' long-term FCF growth rate) and beta of 0.96 (unchanged).
Mandiri Sekuritas Strategy: The rise of small cap
Flat performance in IDX provides a fertile ground for smaller-cap stocks to play. With new offerings expected to flood the market in 4Q, portfolio reconstructions will limit the performance of big- cap stocks, hence opening a wider window for smaller counters to a further run. A milder-than-expected August inflation figure sent another lease of life. With on-month inflation easing in August, we propose small-cap stocks such as industrial land developer KIJA, and mall and property develo! per SMRA. We still like big- cap stocks like BBRI, and LSIP. For those adrenaline junkies, BUMI is another pick with upcoming positive catalysts in the form of non-preemptive rights issue exercise and the planned IPO of its subsidiary Bumi Mineral Resources.
The rise of small cap. No particular fundamental trend observed in the market in August. Sectoral index with bigger composition of small cap tended to outperform. After July worst performance, JAKAGRI (Agriculture, CPO producers) made a comeback, and posted the highest performance by sector index (+3.9% MoM), followed by JAKBIND (Basic Industry) (+3.5% MoM) and JAKPROP (Construction, Property) (+1.6%MoM). Small-cap names ruled with the strongest performance by MAPI (+96.7% MoM). As! the JCI posted a flattish return, retail punters are looking for excitements in the counters with positive fundamental catalysts.
Interest rates are expected to rise, however inflation is seen easing. Consumer Price Index rose by 0.76% mom or increased 6.44% yoy in Aug10 lower than our and consensus estimates. Year-to-date, the CPI has increased 4.82%. Aug10 inflation was mainly driven by electricity tariff hike (0.35ppt) and processed food (0.11ppt). Meanwhile, raw food prices only increased slightly (0.09ppt), as some of the prices have started to decline from their peaks in Jul10 inflation. We expect to see a more hawkish stance in BI policy statem! ent, as there some indication that demand started to stoke inflation and inflation expectation is building up, indicating by a steady increase in core inflation. Trade balance turned deficit in Jul10 of US$0.13bn, as export stabilized (29.0% yoy) and imports surged (45.3% yoy). Despite the persistent trend, the deterioration in trade balance may not have directly put pressure on the currency as we believe it will be compensated by capital inflows.
Our MAPI August recommendation was the best monthly gainer. Up 96.7% MoM, MAPI posted the strongest monthly performance. The other strong gainers were paper maker TKIM (+55.6% MoM) and tire maker GJTL (+39.8% MoM) Easing inflation number put past on wayward inflation threat, hence strengthens confidence in measured interest rate hike. Hence we still like property and banks.
The rise of small cap. No particular fundamental trend observed in the market in August. Sectoral index with bigger composition of small cap tended to outperform. After July worst performance, JAKAGRI (Agriculture, CPO producers) made a comeback, and posted the highest performance by sector index (+3.9% MoM), followed by JAKBIND (Basic Industry) (+3.5% MoM) and JAKPROP (Construction, Property) (+1.6%MoM). Small-cap names ruled with the strongest performance by MAPI (+96.7% MoM). As! the JCI posted a flattish return, retail punters are looking for excitements in the counters with positive fundamental catalysts.
Interest rates are expected to rise, however inflation is seen easing. Consumer Price Index rose by 0.76% mom or increased 6.44% yoy in Aug10 lower than our and consensus estimates. Year-to-date, the CPI has increased 4.82%. Aug10 inflation was mainly driven by electricity tariff hike (0.35ppt) and processed food (0.11ppt). Meanwhile, raw food prices only increased slightly (0.09ppt), as some of the prices have started to decline from their peaks in Jul10 inflation. We expect to see a more hawkish stance in BI policy statem! ent, as there some indication that demand started to stoke inflation and inflation expectation is building up, indicating by a steady increase in core inflation. Trade balance turned deficit in Jul10 of US$0.13bn, as export stabilized (29.0% yoy) and imports surged (45.3% yoy). Despite the persistent trend, the deterioration in trade balance may not have directly put pressure on the currency as we believe it will be compensated by capital inflows.
Our MAPI August recommendation was the best monthly gainer. Up 96.7% MoM, MAPI posted the strongest monthly performance. The other strong gainers were paper maker TKIM (+55.6% MoM) and tire maker GJTL (+39.8% MoM) Easing inflation number put past on wayward inflation threat, hence strengthens confidence in measured interest rate hike. Hence we still like property and banks.
NISP Intiland Development to be sold at discount (DILD, Rp670)
· Intiland Develepment’s shareholders, Permata Ratnamulia, Cakrawala Persada Gemilang and Cempaka Andalan Kaharisma, is offering their 40.7% ownership in Intiland at Rp529 – Rp590 a share or 12% - 21% discount to market price.
· The transaction for this 2.11bn shares is estimated to reach Rp1.20tn and make the buyer as the largest single shareholder at Intiland Development.
· DILD is trading at 2011F consensus PER of 18.7x and EV/EBITDA of 14.3x.
· The transaction for this 2.11bn shares is estimated to reach Rp1.20tn and make the buyer as the largest single shareholder at Intiland Development.
· DILD is trading at 2011F consensus PER of 18.7x and EV/EBITDA of 14.3x.
NISP Astra Agro Lestari divests ownership in subsidiary (AALI, Rp20,100)
· Astra Agro Lestari sold 100% of its ownership in Surya Panen Subur, AAL’s subsidiary in Aceh. This transaction is worth US$27.33mn and AAL cited that SPS’ area of 3,000 ha could not meet AAL’s economic production scale. AAL aquired SPS in 2007 with acquisition value of Rp161.0bn.
· AAL added that the conditional sales and purchase agreement has been signed last month with the buyer, PT Agro Maju Raya and PT Hamparan Sawit Nusantara.
· The impact on AAL’s production is less significant assuming the area yields around 13,000 tons of CPO compared to AAL’s production target of 1mn tons.
· Currently, AALI is trading at 2011F PER of 16.1x and EV/EBITDA of 8.7x.
· AAL added that the conditional sales and purchase agreement has been signed last month with the buyer, PT Agro Maju Raya and PT Hamparan Sawit Nusantara.
· The impact on AAL’s production is less significant assuming the area yields around 13,000 tons of CPO compared to AAL’s production target of 1mn tons.
· Currently, AALI is trading at 2011F PER of 16.1x and EV/EBITDA of 8.7x.
NISP Indo Tambangraya Megah to be sold at Rp36,150 – Rp38,500 (ITMG, Rp39,300, Hold)
· It is reported that Banpu Minerals aims for Rp3.56tn – Rp3.79tn from its divestment of 98.5mn share in ITM or equal to 8.7% ownership. Currently Banpu Minerals owns 73.72% ITM, which translates into 832.9mn shares. The offering structure is 73.9mn shares with option to sell additional 24.6mn shares of ITM.
· The news added that Banpu Minerals has appointed Goldman Sachs and several domestic houses to help the transaction. There is no confirmation from the company regarding this transaction.
· Currently ITMG is trading at 2011F PER of 13.6x and EV/EBITDA of 8.1x, Hold.
· The news added that Banpu Minerals has appointed Goldman Sachs and several domestic houses to help the transaction. There is no confirmation from the company regarding this transaction.
· Currently ITMG is trading at 2011F PER of 13.6x and EV/EBITDA of 8.1x, Hold.
NISP Inflation cools off, below expectation
· Inflationary pressures in August alleviated as the consumer price index only increased by 0.76% MoM and 6.44% YoY. This was under the consensus expectation of 1.00% MoM and 6.69% YoY , which may rising expectation that prices have reached their peaks and stabilized.
· Exports were flat in July 2010, only growing by 1.3% MoM to US$12.49bn, while imports grew by 7.3% MoM to US$12.61bn. This means for the first time this year, Indonesia recorded a trade deficit of US$128.7mn.
· With this figure, we expect Bank Indonesia to maintain its benchmark rate at 6.5% this month as YTD inflation is still at 4.82%. However there is still some upward risk to inflation this month, as we approach the Lebaran holidays. Core inflation was also higher last month at 0.52% MoM and potentially to be higher again this month.
· Exports were flat in July 2010, only growing by 1.3% MoM to US$12.49bn, while imports grew by 7.3% MoM to US$12.61bn. This means for the first time this year, Indonesia recorded a trade deficit of US$128.7mn.
· With this figure, we expect Bank Indonesia to maintain its benchmark rate at 6.5% this month as YTD inflation is still at 4.82%. However there is still some upward risk to inflation this month, as we approach the Lebaran holidays. Core inflation was also higher last month at 0.52% MoM and potentially to be higher again this month.
CLSA Intiland (DILD IJ), Awakening?
Sarina looked at Intiland (DILD IJ). This is a property company with US$780mn market cap. The company has recently acquired 1,330ha land in Greater Jakarta, funded from rights issue proceeds Total land bank is now 2,400ha and balance sheet was revived.
We are cautious. Most of the acquired land is in relatively remote area. While DILD has 40 years of experience, the company has not been very active post Asian crisis era, due to its lengthy debt restructuring process. Not tested = execution risk. Valuation wise, it is trading at 30% discount to NAV. Not attractive compared to its peers.
Key points from the report:
Adding 1,330ha through Rights Issue. DILD raised Rp2tn from Rights Issue in Apr2010 and acquired 1,300ha land bank in West part of Greater Jakarta. The acquisition gives an enlarged land bank of 2,400ha. DILD plans to step up development of 690ha in next five years.
Balance sheet revived post Rights. The D/E ratio declined to 5% in June2010 from 31% in 2009. Profit in 1H10 increased to Rp223bn (1H09:Rp6bn) due mostly to divestment of non-core asset.
Nonetheless, DILD still runs negative retained earnings of Rp191bn as of 1H10.
Risks to execution. We think the risk lies on the fact that most of the acquired land is in relatively remote area, hence the company has to rely heavily on potential future infrastructure development, and build the township from scratch. The prospect of city property looks more promising. DILD also lacks experience being dormant for a long time.
Trading at 30% discount to NAV. The company now trades at 30% discount to its NAV based on latest appraisal by Colliers International, v.s. peers average at 55%.
The company had mentioned that the new investors which currently hold 38.1% stake will divest their stakes in the future.
We are cautious. Most of the acquired land is in relatively remote area. While DILD has 40 years of experience, the company has not been very active post Asian crisis era, due to its lengthy debt restructuring process. Not tested = execution risk. Valuation wise, it is trading at 30% discount to NAV. Not attractive compared to its peers.
Key points from the report:
Adding 1,330ha through Rights Issue. DILD raised Rp2tn from Rights Issue in Apr2010 and acquired 1,300ha land bank in West part of Greater Jakarta. The acquisition gives an enlarged land bank of 2,400ha. DILD plans to step up development of 690ha in next five years.
Balance sheet revived post Rights. The D/E ratio declined to 5% in June2010 from 31% in 2009. Profit in 1H10 increased to Rp223bn (1H09:Rp6bn) due mostly to divestment of non-core asset.
Nonetheless, DILD still runs negative retained earnings of Rp191bn as of 1H10.
Risks to execution. We think the risk lies on the fact that most of the acquired land is in relatively remote area, hence the company has to rely heavily on potential future infrastructure development, and build the township from scratch. The prospect of city property looks more promising. DILD also lacks experience being dormant for a long time.
Trading at 30% discount to NAV. The company now trades at 30% discount to its NAV based on latest appraisal by Colliers International, v.s. peers average at 55%.
The company had mentioned that the new investors which currently hold 38.1% stake will divest their stakes in the future.
Citigroup Global Equity Strategist - The End Of A Cult
Equity Cult — Global pension funds spent the second half of the 20th century raising their equity weightings to well over 50%, mostly at the expense of bonds.
Cult Reversed — It has taken 10 years, and two 50% bear markets, to reverse this cult. European and Japanese equities are already trading on dividend yields above government bond yields. US equities are almost there as well. An immediate reincarnation of the equity cult seems unlikely.
Equity Overhang — Global corporates, especially the mega-caps, rushed to exploit
cheap financing as the equity cult inflated. They have been slow to redeem equity
now that the cult has deflated. Equity oversupply remains a drag on share prices.
De-equitisation The Answer — As conventional investors sell, so corporates have
stepped in as the marginal buyer of global equities. Investors should tilt portfolios
to exploit de-equitisation themes such as M&A and share buy-backs.
Emerging Markets The Exception — The Emerging Markets equity culture remains
robust. Companies can issue equity, capex is booming, and large-cap stocks are
not under shareholder pressure to break up. Enjoy it while it lasts.
Cult Reversed — It has taken 10 years, and two 50% bear markets, to reverse this cult. European and Japanese equities are already trading on dividend yields above government bond yields. US equities are almost there as well. An immediate reincarnation of the equity cult seems unlikely.
Equity Overhang — Global corporates, especially the mega-caps, rushed to exploit
cheap financing as the equity cult inflated. They have been slow to redeem equity
now that the cult has deflated. Equity oversupply remains a drag on share prices.
De-equitisation The Answer — As conventional investors sell, so corporates have
stepped in as the marginal buyer of global equities. Investors should tilt portfolios
to exploit de-equitisation themes such as M&A and share buy-backs.
Emerging Markets The Exception — The Emerging Markets equity culture remains
robust. Companies can issue equity, capex is booming, and large-cap stocks are
not under shareholder pressure to break up. Enjoy it while it lasts.
JP Morgan - Adaro Energy - Risk to consensus FY11 earnings forecast; downgrade to UW
We downgrade ADRO to UW and reduce PT to Rp1,700: On the back of slower volume and profit growth than peers, downside risk to consensus’ FY11E earnings forecast and high valuation, we downgrade ADRO from OW to UW and reduce our PT from Rp2,600 to Rp1,700. We think downward revision to consensus earnings is likely, and that
this could result in ADRO underperforming.
Investment drivers: We think the following factors will negatively affect ADRO share price performance in the next 6-12 months: Negatives: (1) Downward pressure on coal price; (2) Relatively slower FY11E volume and earnings growth compared to its peers; (3) Downward revision in consensus’ earnings estimates; and (4) High valuation (one of the most expensive on FY11E P/E). Upside risk: Higher-than-expected coal price.
Reduce our FY10E/FY11E net income by 13.7%/21.4%: With the lower-than-expected results recorded in 2Q10, we lower our FY10E and FY11E net income by 13.7% and 21.4%, respectively. In the past six months, the stock has underperformed the JCI index by 19.7%; despite the relatively small downside in absolute terms, we see further underperformance from here on the back of consensus downgrades and
because we estimate ADRO’s FY11 volume and profit growth will be among the lowest of industry peers.
Downside risk to consensus FY11E earnings: Our FY10E and FY11E net income forecasts are 16.9% and 32.2% below the Street’s estimates. We therefore see downside risk to consensus earnings, as the current consensus FY11E operating profit forecast of Rp11,798 billion implies an operating profit of US$27.3/ton, a level which has not been seen even when the coal price averaged US$125/ton.
this could result in ADRO underperforming.
Investment drivers: We think the following factors will negatively affect ADRO share price performance in the next 6-12 months: Negatives: (1) Downward pressure on coal price; (2) Relatively slower FY11E volume and earnings growth compared to its peers; (3) Downward revision in consensus’ earnings estimates; and (4) High valuation (one of the most expensive on FY11E P/E). Upside risk: Higher-than-expected coal price.
Reduce our FY10E/FY11E net income by 13.7%/21.4%: With the lower-than-expected results recorded in 2Q10, we lower our FY10E and FY11E net income by 13.7% and 21.4%, respectively. In the past six months, the stock has underperformed the JCI index by 19.7%; despite the relatively small downside in absolute terms, we see further underperformance from here on the back of consensus downgrades and
because we estimate ADRO’s FY11 volume and profit growth will be among the lowest of industry peers.
Downside risk to consensus FY11E earnings: Our FY10E and FY11E net income forecasts are 16.9% and 32.2% below the Street’s estimates. We therefore see downside risk to consensus earnings, as the current consensus FY11E operating profit forecast of Rp11,798 billion implies an operating profit of US$27.3/ton, a level which has not been seen even when the coal price averaged US$125/ton.
Credis Suisse Banpu sells 8.72% in ITMG
● Banpu sold 98.5 mn shares or 8.72% of ITMG, effectively reducing its stake from 73.72% to 65%. The indicative price range is Rp36,150-38,500/share. We expect Banpu to raise about US$400 mn from the transaction.
● The ITMG stake selldown is not totally unexpected, but has been listed as one of Banpu’s options to raise fund to buy CEY. Strategically, this reflects reallocation of capital within the Banpu group from a more expensive market in Indonesia to an asset with more visible long-term growth and less-demanding valuation as CEY.
● The minority shareholders of ITMG would benefit from higher free float and liquidity. We expect ITMG’s profile with foreign investors to improve, as trading liquidity should rise from the current level of about US$4.4 mn.
● We expect the transaction to have negative impact to ITMG’s share price in the short term. In the medium term, we see ITMG as the most leverage play on rising spot coal prices, with the highest dividend yield. Our target price of Rp49,000 is based on a P/E of 12x.
● The ITMG stake selldown is not totally unexpected, but has been listed as one of Banpu’s options to raise fund to buy CEY. Strategically, this reflects reallocation of capital within the Banpu group from a more expensive market in Indonesia to an asset with more visible long-term growth and less-demanding valuation as CEY.
● The minority shareholders of ITMG would benefit from higher free float and liquidity. We expect ITMG’s profile with foreign investors to improve, as trading liquidity should rise from the current level of about US$4.4 mn.
● We expect the transaction to have negative impact to ITMG’s share price in the short term. In the medium term, we see ITMG as the most leverage play on rising spot coal prices, with the highest dividend yield. Our target price of Rp49,000 is based on a P/E of 12x.
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