Raising TP, but maintaining Sell (3L) rating – We revised our WACC estimates to 12% from 13% as we revised rf to 10% from 11%. This is in line with the decline in the BI policy rate, which is now at 7%, from 9.25% at the end of '08. Thus we raise our target price from Rp7,931/share to Rp8,990/share. Our new TP equates to a PE of 20.8x '10E, a premium to the market (as seen in Fig. 2), but one that appears justified given the high ROE ('09E: 85%). We maintain our Sell rating, however, as we think that valuation has peaked at current level.
Chasing low beta and defensive stock – The share price rallied by 18% in June and 6.5% in July outperforming the JCI (+6% in June and +2.5% in July), although it is still underperforming on a YTD basis (JCI +53%, Unilever +23%). Investors have been chasing low-beta and defensive stocks, and Unilever fits these criteria because: (1) its products are daily necessities; (2) it markets strong brand names; (3) strong balance sheet—zero debt, high ROE, (4) attractive dividend yield on 100% payout ratio; (5) limited capex; (6) strong track record, operations and strategic excellence.
Our estimates are not conservative – Our estimates are 3-5% above consensus’, where we estimate net profit of Rp2.8trn and Rp3.3trn, while consensus is at Rp2.7trn and Rp3.1trn in 2009E and 2010E, respectively. We like the company; however, we think that at current prices, the valuation is demanding and provides limited upside to investors.
Senin, 06 Juli 2009
UOB Kay Hian - Bumi is bidding to team up with regional government for 10% of Newmont?
Bumi is bidding to team up with regional government for 10% of Newmont? BUMI Resources via its subsidiary Multicapital is one of the 4 bidders proposing to be the partner of regional government to buy 10% of Newmont Indonesian gold mine. The regional government has set up an investment arm known as Daerah Maju Bersaing DMB to buy a 10% stake of Newmont with the valuation of US$391m for 10% stake. The ownership of DMB is 40% provincial government Nusa Tenggara Barat, 40% regency government Sumbawa Barat and 20% regency government Sumbawa. According to the commissioner of DMB, BUMI's proposal is BUMI will provide the financing and entitled to profit sharing scheme of BUMI 25% and DMB 75%. The other bidders are Batavia Inc (a subsidiary of British company Amstelco Plc), Valco Corporation and Northstar Pacific Indonesia. Comment: While Newmont should be an attractive asset to own, we are unsure if BUMI's balance sheet willl allow it to gear up to pay for the investment.
Separately, the local press also quoted BUMI's President Director saying that there were potential strategic investors from China, Africa and Australia currently interested to become strategic partner in Bumi's copper and gold mine. Comment: Recent newsflow seemed to suggest that Bumi is seeking strategic partner for its non-coal venture. Obviously, BUMI's balance sheet does not allow it to gear up for further investment in these non-coal ventures. So the only way to do it is by inviting strategic partner who has the capital to invest.
Separately, the local press also quoted BUMI's President Director saying that there were potential strategic investors from China, Africa and Australia currently interested to become strategic partner in Bumi's copper and gold mine. Comment: Recent newsflow seemed to suggest that Bumi is seeking strategic partner for its non-coal venture. Obviously, BUMI's balance sheet does not allow it to gear up for further investment in these non-coal ventures. So the only way to do it is by inviting strategic partner who has the capital to invest.
CLSA Telkom, lagging despite improvement
Telkom (TLKM IJ) has been a difficult stock for many investors. Despite talks about improving competitive landscape, TLKM share price has been a big laggard.
Investors might need another quarter or two of sustainable earnings recovery before TLKM share price can regain momentum. But there are sign that earnings are bottoming from the low in 3Q08, as shown in the table below.
Is TLKM ex growth? In the past 10 years, total mobile industry sub growth has been in the region of 35-100%! Certainly those days are behind us. We are looking at 10-25% sub growth for the next few years.
However, it worth pointing out that (1) while SIM card penetration has hit 70% level, unique individual penetration rate is believed to be much lower at around 50%, given that many Indonesians have more than one mobile phone number. Subs growth will be lower due to the following (2) higher penetration rate + higher base of mobile subs = lower subs growth going forward (3) We believe that marginal subscribers are not spending enough on mobile. Not that they don’t want to talk more but they just don’t have the money. Assuming income will continue rising in Indonesia, expect more mobile spending.
TLKM will go ex div date on 8 July, total div amount is Rp296.94. This will lend support to the stock price.
Key points from the report:
TLKM has underperformed market in 2Q09 as market chasing for high beta stock and ignore the potential earnings recovery.
TLKM still trades below its 5-year average PE while market (JCI) trades at 1sd above. It is seen as defensive stock.
Earnings showed sign of bottoming from the low in 3Q08 and our view of structural change in competition landscape remains unchanged.
TLKM will benefit from industry consolidation and the end of price war given its ability to continue investing in capex at a time when competitors are cutting down spending.
If revenues per minutes hold, TLKM could deliver 6.3% better than expected earnings.
Any 1% further incremental increase in tariff (as price war ends) will lead to further 1.5% upside in earnings.
Indonesia still has room to grow: a) SIM card penetration rates is only at 70% while unique individual penetration rate is estimated at 50%. b) a lot of existing subscribers still can not afford to spend as much as they would like, thus as income increase, spending on telecom services will continue to grow.
Valuation: at 12.2x PE and 5.3x EV/Ebitda, Telkom looks compelling.
Investors might need another quarter or two of sustainable earnings recovery before TLKM share price can regain momentum. But there are sign that earnings are bottoming from the low in 3Q08, as shown in the table below.
Is TLKM ex growth? In the past 10 years, total mobile industry sub growth has been in the region of 35-100%! Certainly those days are behind us. We are looking at 10-25% sub growth for the next few years.
However, it worth pointing out that (1) while SIM card penetration has hit 70% level, unique individual penetration rate is believed to be much lower at around 50%, given that many Indonesians have more than one mobile phone number. Subs growth will be lower due to the following (2) higher penetration rate + higher base of mobile subs = lower subs growth going forward (3) We believe that marginal subscribers are not spending enough on mobile. Not that they don’t want to talk more but they just don’t have the money. Assuming income will continue rising in Indonesia, expect more mobile spending.
TLKM will go ex div date on 8 July, total div amount is Rp296.94. This will lend support to the stock price.
Key points from the report:
TLKM has underperformed market in 2Q09 as market chasing for high beta stock and ignore the potential earnings recovery.
TLKM still trades below its 5-year average PE while market (JCI) trades at 1sd above. It is seen as defensive stock.
Earnings showed sign of bottoming from the low in 3Q08 and our view of structural change in competition landscape remains unchanged.
TLKM will benefit from industry consolidation and the end of price war given its ability to continue investing in capex at a time when competitors are cutting down spending.
If revenues per minutes hold, TLKM could deliver 6.3% better than expected earnings.
Any 1% further incremental increase in tariff (as price war ends) will lead to further 1.5% upside in earnings.
Indonesia still has room to grow: a) SIM card penetration rates is only at 70% while unique individual penetration rate is estimated at 50%. b) a lot of existing subscribers still can not afford to spend as much as they would like, thus as income increase, spending on telecom services will continue to grow.
Valuation: at 12.2x PE and 5.3x EV/Ebitda, Telkom looks compelling.
UOB Kay Hian - on Bumi
Bumi Resources (BUMI IJ) BUY
Price/Tgt: Rp1,860/ Under Review Mkt Cap: US$3,535.8m Daily: Vol 342.2m (US$62m) 1-Yr Hi/Lo: Rp8,450/385
Could only get better
We brought BUMI for NDR to KL last week meeting. Most investors agree that BUMI is attractively priced but there are still lingering concerns on the group's corporate governance. Our view is that as BUMI trades at close to 20% discount to its peers in terms of PER, the corporate governance risks are thus priced in.
We highlight catalysts in the near future:
Increasing production in 2Q. BUMI sold only 11.5m tones of coal in 1Q. But the management indicated that in May-June, it is running at monthly output of 5mt. Extrapolating this, we expect BUMI's 2Q production to reach 14mt, up 21% QoQ. We think BUMI should be able to achieve sales volume of 56-58mt in 2009E, up 8-12% yoy.
JORR certification of FBS points to reserve of 174mt, result out within one month. One of the main criticism of Fajar Bumi Sakti's acquisition was that the deal was very expensive at Rp3.2tr based on 14.5mt reserves (1.5mt open pit and 13mt underground) implying EV of US$21/t. The stock exchange authority has asked BUMI to reduce its acquisition cost by 14% implying EV of US$18/t. BUMI's own estimate is that FBS reserve should amount to 98m tones, higher than the Indonesian Coal Book's 2008/2009 data of 14.5mt. The management indicated that it is having JORR to certify FBS reserve which estimate should come up within a month and that the reserve should be even higher at 174mt. Should this turn out to be true, this implies acquisition cost of EV US$1.5/t, cheaper than the recent acquisitions of US$5-7/t, and also much lower than analysts' previous estimate of US$18/t based on Indonesian Coalbook of 14.5mt.
Chinese investor taking a stake in exchange for off-take agreements. BUMI indicated that it is selling for the first time 8-9mt of coal to China this year. Management does not rule out that talks are ongoing for off-take agreements with Chinese buyer and to show goodwill, the buyer may take up a small stake in BUMI (maybe up to 5% stake). There are market talks that the Bakrie family to place out a 10% stake to the Chinese strategic investor. We are convinced that there are talks with the Chinese buyer but the risk is that the negotiation could be dragged out.
Unlocking values of Herald but still preliminary. Management acknowledged that there are talks to sell a stake of Herald Resources to a Chinese investor as part of the move to raise funding to fund the exploration costs but the talks are still very preliminary. The forestry permit approval should be issued post Presidential election which should allow analysts to start factoring in Herald value.
General Update:
EBITDA of US$1.0-1.1bn in 09E. Management is guiding for ASP of US$62 in 09E versus US$73 in 08. With 1Q09 ASP of US$75/t, this implies average ASP of US$57-58 in 2Q-4Q09. But with costs coming down to US$33, it should be able to achieve US$1.0-1.1bn EBITDA in 09E slightly lower than consensus projection of US$1.2bn.
Lower dividend and lower acquisition cost should help balance sheet. BUMI's management has opted to be prudent with only 15% dividend payout in 2007 versus normal payout of 30%. Additionally, it will be buying 50% of FBS as compared to previously 76%; this coupled with the lower price tag thus reducing BUMI's acquisition cost by US$108m. The management explained, that the recent AGM whereby shareholders approval sought to pledge its two coal mines KPC and Arutmin as well as its stake in Herald Resources, are merely creditors asking for increased collateral. The management is looking to keep its debts at 1.0x EBITDA. The capex planned of US$700m are for 3-year period for conveyor belts and ports expansion. Additional capex of US$700-800m will be vendor financed for sourcing of heavy equipment.
Could sell forward at US$86/t in 2H10. The management said that there are buyers who would pay US$86/t for deliveries in 2H10 but it only sold forward a very small amount of 0.3mt. BUMI expects coal price to firm towards US$100/t by end-2010 from currently US$70.
But typical Bakrie group still eyeing for other assets. While the management indicated that it is looking to keep debts at 1.0x EBITDA, it is however eyeing for other assets including diamond mine in Libya, and coking coal concession owned by BHP. While the BHP coking coal concession is attractive given that it is a very sizeable concession (but the infrastructure costs are likely to be expensive given it is far from the port), we do not think that BUMI's balance sheet allows it to invest in so many assets at the same time.
Price/Tgt: Rp1,860/ Under Review Mkt Cap: US$3,535.8m Daily: Vol 342.2m (US$62m) 1-Yr Hi/Lo: Rp8,450/385
Could only get better
We brought BUMI for NDR to KL last week meeting. Most investors agree that BUMI is attractively priced but there are still lingering concerns on the group's corporate governance. Our view is that as BUMI trades at close to 20% discount to its peers in terms of PER, the corporate governance risks are thus priced in.
We highlight catalysts in the near future:
Increasing production in 2Q. BUMI sold only 11.5m tones of coal in 1Q. But the management indicated that in May-June, it is running at monthly output of 5mt. Extrapolating this, we expect BUMI's 2Q production to reach 14mt, up 21% QoQ. We think BUMI should be able to achieve sales volume of 56-58mt in 2009E, up 8-12% yoy.
JORR certification of FBS points to reserve of 174mt, result out within one month. One of the main criticism of Fajar Bumi Sakti's acquisition was that the deal was very expensive at Rp3.2tr based on 14.5mt reserves (1.5mt open pit and 13mt underground) implying EV of US$21/t. The stock exchange authority has asked BUMI to reduce its acquisition cost by 14% implying EV of US$18/t. BUMI's own estimate is that FBS reserve should amount to 98m tones, higher than the Indonesian Coal Book's 2008/2009 data of 14.5mt. The management indicated that it is having JORR to certify FBS reserve which estimate should come up within a month and that the reserve should be even higher at 174mt. Should this turn out to be true, this implies acquisition cost of EV US$1.5/t, cheaper than the recent acquisitions of US$5-7/t, and also much lower than analysts' previous estimate of US$18/t based on Indonesian Coalbook of 14.5mt.
Chinese investor taking a stake in exchange for off-take agreements. BUMI indicated that it is selling for the first time 8-9mt of coal to China this year. Management does not rule out that talks are ongoing for off-take agreements with Chinese buyer and to show goodwill, the buyer may take up a small stake in BUMI (maybe up to 5% stake). There are market talks that the Bakrie family to place out a 10% stake to the Chinese strategic investor. We are convinced that there are talks with the Chinese buyer but the risk is that the negotiation could be dragged out.
Unlocking values of Herald but still preliminary. Management acknowledged that there are talks to sell a stake of Herald Resources to a Chinese investor as part of the move to raise funding to fund the exploration costs but the talks are still very preliminary. The forestry permit approval should be issued post Presidential election which should allow analysts to start factoring in Herald value.
General Update:
EBITDA of US$1.0-1.1bn in 09E. Management is guiding for ASP of US$62 in 09E versus US$73 in 08. With 1Q09 ASP of US$75/t, this implies average ASP of US$57-58 in 2Q-4Q09. But with costs coming down to US$33, it should be able to achieve US$1.0-1.1bn EBITDA in 09E slightly lower than consensus projection of US$1.2bn.
Lower dividend and lower acquisition cost should help balance sheet. BUMI's management has opted to be prudent with only 15% dividend payout in 2007 versus normal payout of 30%. Additionally, it will be buying 50% of FBS as compared to previously 76%; this coupled with the lower price tag thus reducing BUMI's acquisition cost by US$108m. The management explained, that the recent AGM whereby shareholders approval sought to pledge its two coal mines KPC and Arutmin as well as its stake in Herald Resources, are merely creditors asking for increased collateral. The management is looking to keep its debts at 1.0x EBITDA. The capex planned of US$700m are for 3-year period for conveyor belts and ports expansion. Additional capex of US$700-800m will be vendor financed for sourcing of heavy equipment.
Could sell forward at US$86/t in 2H10. The management said that there are buyers who would pay US$86/t for deliveries in 2H10 but it only sold forward a very small amount of 0.3mt. BUMI expects coal price to firm towards US$100/t by end-2010 from currently US$70.
But typical Bakrie group still eyeing for other assets. While the management indicated that it is looking to keep debts at 1.0x EBITDA, it is however eyeing for other assets including diamond mine in Libya, and coking coal concession owned by BHP. While the BHP coking coal concession is attractive given that it is a very sizeable concession (but the infrastructure costs are likely to be expensive given it is far from the port), we do not think that BUMI's balance sheet allows it to invest in so many assets at the same time.
KimEng Bank Mandiri: An attractive valuation, BUY
Growing bigger efficiently
Bank Mandiri’s deposit franchise is the biggest in the sector, accounting for 14.5% of total third party funds at commercial banks. The excess liquidity will act as a strong base for Mandiri’s estimated loan growth of 15.6% in 2009 and 20.0% in 2010F. In 1Q09, Mandiri managed to outperform BRI in terms of total credit. The bank’s huge business scale translates into high operating efficiency, at 42.3% Cost-to-Income Ratio by 1Q09, down from 48.8% in 1Q08. But this is not without room for further improvement on the long term. The overall characteristics create an appealing combination seldom found in the banking sector.
Targeting a better balance in asset
After a recent cut in mortgage rate, the bank signaled an intention to reduce its entire lending rate to accommodate growth in loan demand. As of 1Q09, mortgage remained the bigger portion of Mandiri’s total consumer lending. The overall figure has gradually climbed by 25% YoY to Rp19.7t in 1Q09. While new loans are expected to generate lower yields, Mandiri will be one of the beneficiaries of the upward trend in credit cycle. The bank plans to expand its high-yield retail lending base. Hence, we expect Net Interest Margin to increase after 2011F on better asset and deposit mix, and enhanced loan quality which will consequently reduce the amount of Non Performing Loan.
Eyes on the lower NPL
Mandiri’s current 6.5% gross NPL ratio makes us more comfortable on the bank’s risk management over its bad loan legacy. Although the ratio is still high compared to industry average of 3.9%, we have seen a significant reduction from 16.4% NPL by end of 2006. Nevertheless, we like to keep an eye on the write-offs and restructured loans details as often that NPL ratio underestimates the level of bad loans. Recent new NPL formation suggests that NPL to rise to 7.5% by 2011F. However the rate should be lower afterwards as the economy improves.
Alternative investment with high ROE
With the above mitigating factors, we recommend BUY on Bank Mandiri at TP Rp3,900/share, implying a 22.8% upside potential from current price. Based on our target price, Mandiri will be trading at 2010F PBV of 2.1x and PER of 12.1x. Our target price is based on PBV valuation, with ROE forecast of 19.0%, above the 15.5% cost of capital. At this sustainable ROE rate, and 2010F PBV of 1.7x on current price, we find Mandiri’s valuation attractive compared to its peers (banking stocks are trading at an average 2.3x PBV)
Risks
The main risk to our target price and earnings estimates is a surge in inflation, which will affect interest rates, loan demand, and asset quality. Bank Mandiri is also exposed to decreasing yields from its bond portfolio, as it consists mostly of those with variable rates. Another issue to watch for is the bank’s NPL ratio as it shows a new NPL formation despite its ability to gradually reduce the bad loan legacy.
Bank Mandiri’s deposit franchise is the biggest in the sector, accounting for 14.5% of total third party funds at commercial banks. The excess liquidity will act as a strong base for Mandiri’s estimated loan growth of 15.6% in 2009 and 20.0% in 2010F. In 1Q09, Mandiri managed to outperform BRI in terms of total credit. The bank’s huge business scale translates into high operating efficiency, at 42.3% Cost-to-Income Ratio by 1Q09, down from 48.8% in 1Q08. But this is not without room for further improvement on the long term. The overall characteristics create an appealing combination seldom found in the banking sector.
Targeting a better balance in asset
After a recent cut in mortgage rate, the bank signaled an intention to reduce its entire lending rate to accommodate growth in loan demand. As of 1Q09, mortgage remained the bigger portion of Mandiri’s total consumer lending. The overall figure has gradually climbed by 25% YoY to Rp19.7t in 1Q09. While new loans are expected to generate lower yields, Mandiri will be one of the beneficiaries of the upward trend in credit cycle. The bank plans to expand its high-yield retail lending base. Hence, we expect Net Interest Margin to increase after 2011F on better asset and deposit mix, and enhanced loan quality which will consequently reduce the amount of Non Performing Loan.
Eyes on the lower NPL
Mandiri’s current 6.5% gross NPL ratio makes us more comfortable on the bank’s risk management over its bad loan legacy. Although the ratio is still high compared to industry average of 3.9%, we have seen a significant reduction from 16.4% NPL by end of 2006. Nevertheless, we like to keep an eye on the write-offs and restructured loans details as often that NPL ratio underestimates the level of bad loans. Recent new NPL formation suggests that NPL to rise to 7.5% by 2011F. However the rate should be lower afterwards as the economy improves.
Alternative investment with high ROE
With the above mitigating factors, we recommend BUY on Bank Mandiri at TP Rp3,900/share, implying a 22.8% upside potential from current price. Based on our target price, Mandiri will be trading at 2010F PBV of 2.1x and PER of 12.1x. Our target price is based on PBV valuation, with ROE forecast of 19.0%, above the 15.5% cost of capital. At this sustainable ROE rate, and 2010F PBV of 1.7x on current price, we find Mandiri’s valuation attractive compared to its peers (banking stocks are trading at an average 2.3x PBV)
Risks
The main risk to our target price and earnings estimates is a surge in inflation, which will affect interest rates, loan demand, and asset quality. Bank Mandiri is also exposed to decreasing yields from its bond portfolio, as it consists mostly of those with variable rates. Another issue to watch for is the bank’s NPL ratio as it shows a new NPL formation despite its ability to gradually reduce the bad loan legacy.
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