CLSA BBNI, initiating coverage, OPF, TP Rp2800

Our bank analyst Bret Ginesky has initiated coverage on Bank Negara (BBNI IJ) with OPF rating and Rp2,800 TP. At 1.8x 2010 PBV, BBNI is the cheapest SOE bank in Indonesia. We forecast earnings to grow by 28% CAGR from 2009-12, raising ROE to 21% from 14% in 2009.

With only 12% upside from yesterday closing price, Bret is telling us that there is not much incentive for investors to jump in right now. However, CLSA Jakarta sales desk thinks that Bret is too conservative. His Rp2,800 TP implies 2x 2010 PBV and this time of the year, we believe that using 2011 BV is more appropriate. At 2x 2011 PBV, we’ll arrive at Rp3,114 TP.

Bret pointed out that BBNI did not possess the flexibility BMRI was blessed with in its turnaround, as BBNI is one franchise, not an amalgamation of multiple banks.

However, there are notable improvements at BBNI:

· BBNI’s turnaround goes well beyond poor credit metrics. Revenue generation is weak based on BNI’s headcount and branch network, Indonesia’s strong economy should help support the turnaround effort
· Increasing its coverage ratio to 120% from 55%.
· Improving the cost to income ratio to 52% from 61% since 2006.
· Halving the NPL ratio over the last four years has not closed the gap with its peer group.
· BBNI is reducing the headcounts (early retirement). At one point, BBNI had over 4,000 employees at the HQ, a figure that has been nearly halved.

On the weakness side, deposit generation has been disappointing, as core deposit market share has decreased 340bps to 9.7% since 2005. The recent appointment of professionals with strong track records such as Honggo and Darmadi should bring diversity to the management and helps BBNI to address issues with deposit taking franchise.

Lastly, BBNI (just like other Indonesian banks) over-provides for provisions. Hypothetically speaking, if BBNI were allowed to release provisions directly to earnings, profits for 2010 and 2011 would increase by 30% and 25%, respectively. One more point, written off loans at BBNI is around Rp20tn (and at BMRI total Rp33tn). There is a chance that SOE banks might be able to resolve written off loans at a discount. If both BBNI were to recover 20% of the written off loans, this would add Rp4.0tn to retained earnings. This represents 25% of equity at BBNI (and 19% at BMRI).

CLSA Bumi downgrade to OPF, TP Rp2800

Analyst Olie downgrades Bumi Resources (BUMI IJ) to Outperform (from BUY). We have revised down our earnings by 5% to 30% with higher ASP negated by higher tax and slightly lower contribution from NNT. Olie cuts the TP to Rp2800 (from Rp3800).

BUMI share price has underperformed peers by around 30% YTD. Olie thinks that it is important to see the following catalysts to actually materialize before the underperformance is reversed: (1) tax issue being settled, 2) strategic investors stepping in (3) de-leveraging progressing, and 4) permits for zinc and copper-gold projects that the company plans to float being secured.

We would need to see current political struggle involving key shareholders at Bumi and the government to be settled, as most, if not all, of catalysts mentioned are dependent upon blessing from the government.

BUMI might need to raise additional debt, probably around US$430m, to refinance loan and, potentially, acquire soon-to-be-divested stakes at NNT. Note that the company is unlikely to be able to use restricted cash and short-term investment.

We have been sceptical on BUMI ability to continue paying lower than stated, 45% tax rate (see our note dated back in Aug08). Since profit is booked at operating company level, with effective tax rate of 45% while debt is at Bumi resources as holding company with tax bracket of 25%, the effective tax rate at Bumi Resources should be higher than 45%.

We feel that a lot of negatives are factored in the share price and see more upside risk from current share price level. Having said that, there are just too many moving parts for this stock. Timing for positive catalysts to emerge, politically-related, would be hard to predict.

It would be far easier for investors who want to have exposure to coal names in Indonesia to simply focus on simpler names like Adaro (ADRO IJ) and Indo Tambang (ITMG IJ), both names are our top picks in this space.