DBS BBNI Getting it right Price Target : 12-Month Rp 4,500

• Transformation evident through improved asset quality, operating efficiencies, strong loan and CASA growth traction since 2006
• Rights issue would strengthen capital for future loan growth and secure tax benefits
• Initiate coverage with Buy rating and Rp4,500 TP, implying 29% upside; no reason to trade below industry average; BBNI is our new top pick

Initiate coverage with Buy call and Rp4,500 TP. BBNI is too large a bank to ignore. Currently ranked 4th by asset size, it is the cheapest bank under our coverage. We see no reason why it should trade at below industry average valuations given its positive prospects. The completion of rights issue would strengthen BBNI’s capital to fund future loan growth. There has been substantial progress in the last
three years, with legacy asset quality issues resolved, cost of funds lowered, and improving operating efficiencies. Our Rp4,500 TP is based on the Gordon Growth Model, and equivalent to 2.7x FY11 BV and 14.2x FY11 EPS with the following assumptions: 20% targeted ROE, 13% long term growth and 15.6% cost of equity.

Rights issue will strengthen capital and fund future loan growth. The c.Rp10trn rights issue will raise BBNI’s CAR to above 18% from 13%. This exercise would be one
of the largest capital raising transactions in Indonesia. The structure of the rights issue has not been finalised and is pending Parliamentary approval. Apart from strengthening capital, the rights issue will dilute government ownership
from 73.3% to 60%, and raise BBNI’s free float to 40%, resulting in a 5ppt tax reduction.

Transformation yielding positive results. BBNI started its transformation program in 2003, but substantial progress was only seen in the last three years. It has yielded
positive results, exhibited stronger loan growth, created a larger base of low cost deposits, and improved asset quality. BBNI is gathering pace and positioning itself as a universal banking franchise.

Mandiri Sekuritas ASII: Key Takeaway from lunch meeting with Investor relation (ASII, Rp54,500, BUY, TP: Rp58,000)

􀂄 ASII said current buyer of 4W are people who really need 4W and people who take advantage of current low interest rate.
􀂄 ASII expect interest rate will increase next year, therefore the buyer in next year is people who really need 4W. ASII estimate 4W sales volume will decrease in 2011F around 5% up to 10% yoy. This is below our expectation. Currently, we estimate 4W sales volume will grow by 3.2% yoy in 2011F.
􀂄 ASII expect 2W sales volume will grow by 10% yoy in 2011F. This is within our expectation. Currently, we estimate 2W sales volume will grow by 10.0% yoy in 2011F.
􀂄 We will revisit our assumptions.
􀂄 Currently, ASII trades at PER 2010F and 2011F at 17.4x and 15.9x.

BNPP UNTR Limited upside TP of IDR19,500

ƒBad weather should keep margins under pressure.
ƒHit also by the strong currency.
ƒStrong demand for mining equipment unlikely to compensate.
ƒLimited upside potential – take profit closer to our TP of IDR19,500.

Weather is still the problem
July’s contract mining data does not alleviate our concern about the impact of the unseasonal heavy rain on both production and production costs (while volume-wise coal volume and overburden removal grew 21.5% and 13.5% y-y, it remained flat m-m). Chairman of the Indonesian Coal Association, Bob Kamandanu, recently announced that the association has reduced its coal production forecast for this year from 320m tonnes to 300m tonnes, while PT Bayan Resources also declared force majeure on shipments from its Kalimantan mines due to heavy rains and flooding.

For United Tractors (UT), we are less concerned about production as it has proven its commitment to customers by delivering production on time, but the higher costs associated with this do concern us. This, plus the pressure on a stronger currency, has resulted in UT’s overall margins contracting by 4.8% in the 1H10, basically offsetting the strong turnaround in the heavy equipment segment.

Demand for heavy equipment remained strong
Despite the fact that total coal production in Indonesia may decline, we expect demand for heavy equipment, especially in the mining sector, to remain strong. On top of the new order for expansion announced by the existing coal companies, we believe demand will be supported by replacements for machineries purchased in 2003-2004. We expect demand growth of 75% in 2010 and 15% in 2011 and 2012. Year to July, heavy machinery posted volume growth of 87% to 3,200 units, accounting for 59% of our FY10 volume estimate.

Valuation
Unusual weather (which has raised operating costs in the contract mining business) and concerns about the impact of the strengthening currency (90% of UT’s earnings are USD-linked) are factors preventing us from being more bullish on the company despite it showing exemplary dedication to customers and good corporate governance. Trading at 13.7x our 2011E earnings, we believe the upside is limited and would
advise investors to take profit closer to our TP of IDR19,500, which is derived based on a DCF using a WACC of 12.6% and terminal growth rate of 4.5%. Investors wanting a commodity play will do better owning coal stocks, in our view. Downside risks to our TP for UT: a strengthening IDR and adverse weather patterns. Upside risks: higher-than-expected coal volumes and prices in the mining operations.

NISP ITM is on track to achieve volume target (ITMG, Rp38,500, Hold)

ITM aims for 5.2mn tons of coal production in 2Q10 or 6.1% YoY higher from
4.9mn tons in 2Q09. Compared to 1Q10, the company’s production target is
13.1% lower due to heavy rainfall season.

The company’s target translated into 11.2mn tons of coal production for 1H10,
48.6% of the company’s internal target for 2010F of 23mn tons.

We view this full year target is achievable as in 2H10, contribution from Jorong
and Bharinto of around 1mn tons and 0.2mn tons will start to kick in.

ITM has not shared any details on its financial performance that is scheduled to
be released next week.

Currently ITMG is trading at 2010F PER of 18.6x and EV/EBITDA of 11.3x, Hold.

Mansek PTBA Below consensus –Export,the determinant for 2H (PTBA,Rp16,500, Neutral TP IDR 18.750

With volume achieved only 44.1%of the total company estimate for FY10, and domestic prices contract short of our expectation of Rp685,000/ton (PLN blended contracts :Rp635,100/ton),hopes for PTBA ’ s earnings improvement should be coming from the export.Export needs a boost. Export in 2Q10 was just 0.9Mt (1Q10:1.3Mt).Assuming most of domestic is aimed for PLN,PTBA has to export 5.0Mt in 2H,more than double the
amount in 1H. PTBA aims high in the export,with 20-25%spot transactions and calorific value of 6,700-7,000 kcal,earnings performance is really dependent on the achievement of its sales department.At Rp16,500,is trading at 14.4x and 11.8x,PER10F and PER11F,respectively.

We ’re revising down our forecast to reflect the domestic price.Our preliminary calculations on the new forecasts expect net income at around Rp2.2tn,a 16%downward adjustment.We will review our recommendations and target price.

Mandiri Sekuritas ANTAM: 1Q10 net profits jumps 125%yoy, still trails expectations (ANTM, Rp2,500, Neutral, TP: Rp2,350)

With the improvement in nickel prices and a shift in revenue mix favoring higher margin nickel over gold trading, the company posted net income of Rp202bn, up by 125%yoy, but only equated to some 19% and 17% of our and consensus FY10F. Understandably, with gold trading having less contribution on top-line, revenues fell by 37%yoy to Rp1.6tn, with nickel contributing about 51% (versus 15% in 1Q09), while gold contributed 46%, the remaining 3% came from other resources such as bauxite, etc. Ferronickel sales amounted to 1,663mt with selling price growing by 99% to US$9.38/lb or US$20,680/t. Ferronickel sales would have been higher as well as earnings as about 4,177 tons remained in transit by end of 1Q. Thus. effectively production of ferronickel should have been about 5,840 tons or some 30% of our FY10F forecast. We maintain neutral on the stock, which now trades at PER10F of 23.6x

Mandiri Sekuritas BDMN 1Q2010 results ahead of our expectation (BDMN, Rp5,500 , Neutral, TP: Rp4,900)

􀂄 Bank Danamon reported 1Q2010 earnings of Rp701 bn, a significant 78% yoy increase, led the result to above our expectation and within consensus estimates.

􀂄 The strong bottom line figure, mainly contributed by strong increase of Net-Interest Income, which jumped to Rp2.923 bn (+26.6% yoy), as higher portion of mass market loan that gives better margin for the bank, led the operating income to Rp3,088 bn (+24% yoy).

􀂄 The bank’s gross loan increased by only 1.5% qoq in the 1Q2010, as this came as the result of the slow market trend especially in wholesale (-2% qoq) and retail segments (-4%qoq). However, this is offset by the mass market loan that reached to Rp35,765 bn(+5% qoq), driven by automotive and micro lending business. Mass market currently covers 56% of total loan, versus 44% on 1Q09. As a result of higher growth in mass market loans, NIM is figured at 14.0% (vs. 10.0% 1Q09), while on the other hand ROAA is posted at 2.9%, ROAE 16.4% and CAR 21.5% (vs. 1.5%, 14.6% and 16.9% 1Q09, respectively). The bank aims to have a double growth in loans (20% yoy) by the end of the year, while provisioning is maintained at low figure.

􀂄 At present, BDMN is trading at 2010F P/BV of 2.6x and PER 16.6x. We still call Neutral on the counter.

Mandiri Sekuritas Gudang Garam: FY09F net income was in line with our estimate, but 13% above consensus (GGRM, Rp25,500, Buy, TP: Rp30,000/share)

􀂄 Gudang Garam posted revenues of Rp33tn (+9.0%yoy, +11.5%qoq), this translates to net income of Rp3.5tn (+83.8%yoy, -5.9%qoq).

􀂄 Despite of qoq growth in sales, 4Q09 gross profit was relatively flat while 4Q09 operating profit declined by 17.5%qoq. As the company increased 4Q09 selling expense by 148%qoq, we think the company was aggressively promoting their products through advertising and sales discounts. We will confirm it later after analyst meeting.

􀂄 We still maintain Buy recommendation on GGRM which is trading at PER10-11F of 11.6-10.2x.

The Star Dry spell may lift CPO above RM2,500

Petaling Jaya


Phenomenon will result in lower production and supply shortage

A looming El Nino phenomenon, which brings in dry spells, can result in lower crude palm oil (CPO) production towards year-end and help restore prices to stay above RM2,500 per tonne, say analysts.

A mild El Nino is believed to have taken place over the past one month in South-East Asia and a full-blown effect could be felt by November.

Analysts said CPO prices on average would appreciate by 45% to 62% year-on-year based on the previous El Nino events.

The El Nino, which occurs irregularly once every two to seven years, would normally last 12 to 18 months each time.

Every few years, an unusually warm current flows off the western coast of South America. Its appearance after Christmas lead sailors in Peru to christian it El Nino, the Christ-child in Spanish.

Regions prone to El Nino include South-East Asia, southern Africa and northern Australia with prolonged dry periods while heavy rain falls, sometimes with flooding, in Peru and Ecuador.

A foreign-based brokerage, in its latest plantation report, said: “If El Nino hits as expected in November, this will be a bonus for (oil palm) planters.”

It said two potential CPO price catalysts in the final quarter of 2009 would be El Nino and production shortfall in both palm oil and soyoil.

According to Malaysian Palm Oil Board statistics, local CPO production had been below market expectations for the past two months.

For May, CPO production was up slightly at 1.39 million tonnes from 1.29 million tonnes a month earlier.

Malaysian Palm Oil Estate Owners president Boon Weng Siew said a strengthening El Nino could affect the growth of oil palm fresh fruit bunches (FFB).

“Due to the dry weather, the size of the palm fruits will be smaller and lesser in weightage. Smaller fruits will translate into lesser oil being extracted,” he told StarBiz.

He added that past experiences had shown that FFB production turned 10% to 15% lower in the event of an El Nino.

The La Nina’s (opposite of El Nino) reign last year, which brought heavy rainfall, was favoured for FFB development and higher yields in palm oil.

Boon said the full effect of the El Nino on FFB and CPO yields in local oil palm plantations could be felt within 18 months.

“This would mean CPO prices will likely trade above RM2,500 and even touch RM3,000 per tonne by 2010 on fear of shortage in supply linked to the El Nino impact,” he added.

It is expected that production from Indonesia and Malaysia, which control over 80% of the world’s palm oil production, could be affected by the El Nino phenomenon.

Last month, Malaysia – via Agriculture and Agro-Based Industry Ministry – announced plans to set up a committee to study the impact of El Nino on the agriculture industry.

Danareksa Bank Central Asia (BBCA IJ, Rp3,500, SELL) Overvalued, take profit

FY09-10E EPS increased slightly, but still a SELL
We raise our FY09-10 EPS estimates by 8-5% to account for higher interest income and higher other income booked in 1Q09. Our DDM derived TP edges up to Rp2,725, implying 2.5x-2.2x FY09-10E PBV and 10.8x-9.5x FY09-10E PER. Yes, the bank did show good performance in 1Q09, but that was attributable to higher lending rates while the COF softened– a carryover from 4Q08. Lending, however, was unimpressive – the bank’s loans actually contracted 5% on a QoQ basis. We expect BBCA to cut its lending rates in 2Q09, although loans growth is only expected to pick up in the second half of the year. The bank trades at a rich valuation of 3.3x FY09E PBV. There is better value elsewhere. Maintain SELL.

Lending has slackened; so where will the bank put its money?
NPLs were low at 1.6% in 1Q09 and bank lending is unlikely to be as aggressive as it was last year. Quality continues to be the bank’s main focus, in our view. Nevertheless, we stick with our 11% loans growth assumption this year despite the 5% QoQ contraction in loans in 1Q09. Lending should pick up once BBCA lowers its lending rates - most likely in 2H09 we believe. For now, though, we think BBCA will likely tilt its portfolio towards SBI and government bonds (together they currently account for 39% of total earnings assets). Note that with BBCA’s low COF of 3.6%, the bank will still be able to generate a high NIM of 6-7%. As for the NPLs, they are expected to remain in check and even decline to 1.3% by YE09 as loan restructuring is completed. This should encourage more lending in the future.

But the high NIM may come under pressure
BBCA doesn’t have much room to lower its deposit rates in our view. And, at the same time, the bank is likely to cut lending rates going forward. We therefore expect the NIM to ease to 6.5% by YE09. Higher operating expenses are also inevitable since BBCA plans to open another 100 branches (as compared to 35 branches last year) as part of its efforts to remain the country’s number one “transactional” bank. As a result, we expect the bank’s cost-to-income ratio to increase to 46% in 2009 from 42% last year.

Benefiting less than other banks from consumer recovery
We argue that BBCA benefits less than other banks from either declining interest rates or recovery of the consumer sector. This is because 75% of the bank’s deposits are already low cost deposits and 42% of its loans are channeled to the corporate segment. In fact, declining interest rates shall likely hurt its profitability given that 85% of its assets are variable in nature. As loans only account for 42% of its assets, there is little to buffer the bank from declining interest rates. While consumer lending shall pick up, the bank’s focus will likely remain on corporate and commercial lending given BBCA’s strategy of securing greater transactional value and therefore higher fee based income.