Bahana Spotlight: Banking Update: Capital raising; Top pick: Bank Negara Indonesia (BBNI-HOLD-IDR3,725-TP:IDR4,250)

Wealthy, healthy

NPL antidote & loan growth support: IDR34t in 2010 capital raising
In an effort to support loan growth and comply with the implementation of the Basel II accord, many Indonesian banks are continuing building up their capital bases by way of share issuances and/or lowering dividend payouts. These capital raisings will also allow banks to better withstand shocks from souring loans. Although BI currently imposes minimum CAR of only 8%, the recent RR rulings encourage higher CARs of up to 14%, particularly for banks with high LDRs. Ironically, big banks like BBCA, BMRI, BBNI and BBRI have, as of end July 2010, fallen behind the industry’s average CAR of 18.3% (exhibit 10). This is because banks with higher CARs have raised approximately IDR11.5t via IPOs, rights issues and subordinated debts. Not to be left behind, big banks with lower CARs are implementing rights issue or issuing subordinated debts going forward. Thus, there will be some IDR34t in fund raising this year, of which only 15% have been completed (exhibit 8).

BBNI: IDR9-11t rights issue = New TPs ranging IDR4,700-5,000
With the parliament’s approval, BBNI will pursue a rights issue in 4Q10, concurrently expanding its free float to 40.0% from the current 26.7%. The bank aims total fund raising in the vicinity of between IDR9-11t, assuming a rights price of between IDR2,700-3,300 and additional 3.4b new shares, representing 22.1% of enlarged capital. We believe that this rights issue should be deployed to augment the bank’s capital base in an effort to support its loan expansion and increase CAR to 18-19% from 12.8% previously estimated. Post rights issue, the management targets a near doubling in loan growth to a minimum of 20%. The 5% tax savings from the enlarged free float coupled with additional earnings support arising from the capital raising should help the bank to continue posting strong earnings growth, minimizing EPS dilution from the rights issue in our view. Our sensitively analysis suggests BBNI’s fair value post rights to increase from IDR4,250 to between IDR4,700-5,000 (exhibit 6), based on 2011 P/BV of 2.6x or 26% discount to the industry’s average P/BV of 3.5x.

BMRI: IDR12-14t rights issue = New TPs ranging IDR8,100-8,400
Similarly, BMRI is optimistic that its upcoming rights issue would raise approximately IDR12-14t worth of capital, taking into account the bank’s free float expansion to 40.0% from the current 33.2% through the divestment of the government’s stake in BMRI. Subsequently, this would increase the bank’s CAR from 12.9% to 17-19% post rights issue, eliminating concerns over longer-term growth sustainability for BMRI. Our back-of-the-envelope calculation suggests BMRI’s fair value post rights issue to range between IDR8,100-8,400 from our current target price of IDR7,250

NISP Chandra Asri to merge with Tri Polyta Indonesia (TPIA, Rp3,250)

· Chandra Asri is in its way to merge with Tri Polyta Indonesia through share swap mechanism expected to be concluded imminently. This plan will be proposed in Try Polita’s EGM next month. The merged company will be named PT Chandra Asri Petrochemical Tbk.

· The impact will be positive for Try Polita, as of the end of 2009, Chandra Asri’s assets reached US$1.20bn compared to Tri Polyta’s US$280.0mn.

· The impact is also positive for both of the companies’ holding, Barito Pacific (BRPT, Rp1,240) as the merger will unlock Barito’s ownership value in Chandra Asri. Currently, Barito holds 77.9% stake in Tri Polyta and 70.0% stake in Chandra Asri. Barito’s revenue from petrochemical business, which comes from both companies, reached Rp14.30tn or 99.2% of Barito's 2009 consolidated revenue of Rp14.40tn. Considering Try Polita’s 2009 revenue of 4.70tn in 2009, the figure means that Chandra Asri’s revenue reached more than Rp9.00tn during the period.

· Furthermore, based on the prospectus published today, Try Polita’s revenue as of 1H10 reached Rp2.60tn with Rp166.0bn of net profit, while Chandra Asri logged in US$831.0mn of revenue with US$1.0mn of net profit.

· The share swap ratio is 1 (one) Chandra Asri share for 42,660 shares of Tri Polyta shares. Dilution impacts are 76.24% for Tri Polyta and 23.76% for Chandra Asri. The chosen appraisal stated that fair price for Tri Polyta is at Rp3,579 a share.

Mandiri Sekuritas Perusahaan Gas : To expedite its Floating Storage Regasification Terminals (PGAS, Rp3,850, Buy. TP:Rp5,250)

PGAS which has plans to build two FSRT (one in Belawan, North Sumatera, and one in West Java) is eager to complete the two facilities by end 2011. PGAS is in a JV with Pertamina to build West Java terminal and 100% ownership in North Sumatera terminal. Each of the facilities requires an investment of US$250mn. However, PGAS CFO, Riza P admitted that no definite financing arrangements has been done yet. We have not included the projects in our forecasts, as financial feasibility study has not been
completed yet. At Rp3,850, PGAS is trading at FY10F and FY11F PER of 13.5x, and 13.5x, respectively with EV/EBITDA FY10F and FY11F of 8.3x and 7.3x, respectively.

NISP Astra Agro Lestari posts stable sales volume in 8M10 (AALI, Rp21,250)

· During 8M10, AAL sold 689,446 tons of CPO or relatively stable as it was only 0.8% YoY lower compared to 8M09 period of around 695,000 tons. Despite posting a lower YoY basis, the company’s sales volume rose by 20.6% MoM in August to 115.8k tons from 96.0k tons a month earlier.
· This was AAL’s monthly highest sales volume this year and also coupled with stronger selling price of Rp6,967/kg compared to Rp6,428/kg in July 2010. Thus total ASP during 8M10 reached Rp6,631/kg.
· This data is positive as despite lower sales volume, the company’s 8M10 ASP of Rp6,631/kg was 4.9% YoY higher than Rp6,324/kg in 8M09.
· AALI is trading at 2011F PER of 17.0x and EV/EBITDA of 9.2x.

NISP House of Representatives asks for Mandiri right issue target to be increased (BMRI, Rp6,250)

· The House of Representatives has asked the target from the BNI and Mandiri rights issue to be increased to Rp25.00tn. Initially BNI (BBNI, Rp3,475) has targeted to raise Rp9.00tn while Mandiri targets to obtain Rp13.00-14.00tn.
· Mandiri is still waiting for the approval from the House, so that the rights issue can be held before December 13, 2010 . 2.36bn new shares will be issued by Mandiri where each old share will have the right to purchase 8.5-9 new shares. Target price has not been set, however the company hopes that market price during the rights issue will be around Rp6,300-Rp6,700.
· The consortium of Mandiri Sekuritas and Danareksa Sekuritas has appointed Merril Lynch and Deutsche Bank as joint global coordinator, while book runners will be Citigroup and CLSA.
· BMRI is trading at 2011F PER consensus of 12.8x and PBV of 2.8x.

Indopremier INCO (BUY - TP Rp5,250)

INCO’s strong 1Q10 results came in-line with our estimates, but we revise our forecasts upward to reflect higher nickel prices, which have reverted to more sustainable levels. Maintaining our BUY stance, we raised our TP to Rp5,250, offering 20% potential upside and implying undemanding valuations of 12.9x/10.4x 2010F/2011F PER.

Strong 1Q10, In-line With Expectations
INCO delivered strong 1Q10 results with net profit jumping 344% YoY and 27% QoQ to USD283mn. Higher nickel in matte sales of 23% YoY (+5% QoQ) to 18,021mt, combined with rising ASP to US$14,182/mt translate into strong revenue growth of 111% YoY (+9% QoQ) to USD256mn. Gross margin improved to 41% in 1Q10 as INCO was able to reduce fixed costs in supplies and contracts and services; even with higher fuel usage in 1Q10, COGS/mt remains relatively unchanged with 4Q09 at USD8,367/mt. INCO’s 1Q10 results came in-line with our previous forecasts, which we have adjusted upwards to reflect higher nickel prices (net profit revised up by 47%/56%/45% for 2010-2012). As INCO starts to maximize the use of hydro power, margins could improve further.

Karebbe Project on Track
INCO is allocating USD257.7mn for capital expenditures in 2010, which consists of USD112.1mn for sustaining capital, USD141.3mn for growth capital, and USD4.3mn for health, safety and environment. The Karebbe hydroelectric power generating plant costing USD410mn is progressing as planned and is expected to commence operations in 2H11. By displacing all oil-based fuel usage to feed the electric furnaces at the Sorowako facility, we project COGS/mt could be reduced from USD8,484/mt in 2010 to USD8,435/mt and USD8,180/mt in 2011F/2012F (assuming oil prices of USD80/bbl). As usage of oil-based fuel is reduced in the future, INCO’s earnings will be less sensitive to oil price fluctuations.

Back to More Sustainable Levels
Recovery in world steel demand, which is estimated to increase 10.7% YoY to 1,241 mmt in 2010, has lifted nickel demand and prices in 1Q10. Despite more polished fundamentals, nickel market is still far from being concretely strong as inventory levels remain high. Nickel prices had overran itself when it peaked at US$27,227/mt and quickly fell to US$21,985/mt as market optimism faded in view of China’s tightening of its monetary policy and concerns over the contagion of European sovereign debt crisis began to undermine global economic recovery. Nevertheless, surging automotive steel demand in China and India provide strong support to nickel prices, which at around US$22,000/mt currently, reflects nickel’s fundamentals more closely and seems more sustainable in our view.

NISP Bank Rakyat Indonesia posted strong net income in 2009 period (BBRI, Rp8,250)

• During 2009 BRI managed to post Rp7.3tn of net income, 22.7% YoY higher compared to Rp6.0tn a year earlier. The bank’s net income managed to surpass the consensus’ expectation of Rp6.9tn for the period. This was due to BRI’s ability to post robust growth on loans that reached Rp205.5tn last year, or increased by 27.6% YoY from Rp161.1tn a year earlier.

• The bank still maintains MSME’s loans composition as it gives better yields than the corporate loans segment. During 2009, total MSME loans reached 81.37% of the bank’s total loans, which was higher than 80.88% in 2008 period.

• In TPF side, total deposits grew by 26.1%, or relatively inline with loans growth
in the corresponding 2009. Most of the TPF are still dominated by low cost funding, which accounted for 60.6% of the bank’s total deposit account.

• The combination of favorable assets yield and low cost funding helped the bank
to post a higher net interest income of Rp22.9tn last year, 16.6% YoY higher from Rp19.6tn a year earlier. This was also added by stronger other operating income of Rp3.3tn (+30.7% YoY) from higher fee based income.

• Thus, despite BRI posted a two fold increase in provision, the bank still managed
to book a strong growth in its bottom line.

• On asset quality side, NPL edged higher to 3.5% in 2009 from 2.8% in 2008, however there was a significant improvement during 4Q09 where the bank’s NPL improved from 3.9% in 3Q09 to 3.5% in the end of 4Q09. The bad debt amount also decreased to Rp6.6tn in 4Q09 from Rp7.5tn in 3Q09. Thus the bank decided to lower its provision expenses to Rp407.8bn from Rp2.7tn in 3Q09. The bank felt comfortable with its NPL coverage ratio that reached 1.6x at the end of 2009 period.

• Going forward, BRI aims to maintain its loan growth at 20% YoY – 25% YoY and
aims it NIM to range between 8.5% - 9.5%.

• BBRI is trading at 2010F consensus PER of 11.7x and PBV of 3.1x.