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 ADRO TP idr925

Research Today: Adaro (ADRO IJ), initiating coverage, OPF, TP Rp925

Our analyst Olie initiates coverage on Adaro Energy (ADRO IJ) with an Outperform call and TP of Rp925.

INTERESTING ALTERNATIVE …

From scale and profit growth perspective, ADRO is an interesting alternative in the coal sector. This is the second biggest coal producer (38mn tonnes on 2008, 17% of total Indonesian production) in Indonesia, with 3rd biggest reserves in Indonesia to support future growth (928m tonnes).
Net profit could jump five-fold, driven largely by re-pricing of long-term fixed contracts, lower costs, and steady production growth.
Out of 20mn tonnes already contracted in 2009, ADRO has successfully re-negotiated some of these contracts (16mn out of 20mn).

BUT NOT A DEFENSIVE PLAY ….

However, this is not a defensive play (we prefer ITMG and PTBA for defensive names).
Total debt is about US$930mn, net gearing 52% in 2008, not appealing when peers are in net cash.
Mining cost is cheap but neutralized by expensive transportation costs. Transportation is 75km by road and 250-350km by barging.
Management has been successful in growing productions and marketing envirocoal (very low ash and almost non-existent sulfur). However, we question ADRO’s strategy for asset-heavy-full-integration business model.
The performance of the company’s own mining contractor has been poor.
Some of the recent acquisitions are expensive, in our view.
Rp1.1tn investment in Recapital (no loss provision made so far) is another question mark.
Shares overhang. Lock-up for financial investors, control around 25% stakes, will end in mid March 2009.