DBS Bank Rakyat Indonesia: Growth on track (Buy; Rp9,900; TP Rp11,100 )

At a Glance

• 2Q10 net profit of Rp2,167bn in line
• Earnings were topline driven with stable NIM; NPLs inched up.
• Maintain Buy and Rp11,100 TP

Comment on Results
2Q10 net profit of Rp2,167bn (+1% q-o-q; +26% y-o-y) was largely topline driven with strong loan growth (+8.3% q-o-q) while NIM remained flat at 9.4% as cost of funds stabilized after repricing of time deposits in the previous quarter. Micro and consumer loans continue to dominate BBRI’s loan portfolio collectively comprising 48% of total loans. Microloans grew 9.5% q-o-q, while consumer loans (76% of which are salary-deductible) grew 5.7%. Meanwhile, corporate loans make up 19% of total loans, with the agribusiness segment dominating the composition. Corporate lending has shifted to SOEs which carry lower risk. Deposits continued to grow at 6% q-o-q largely from low costs deposits, which currently comprise 57.6% of total deposits, with the aim of achieving 60%. Loan-to-deposit ratio rose to 88.4%. NPL ratios continued to inch up to 4.3% (from 4.1%) with the key drag still from the small commercial and medium segment. Note that 92% of the NPLs from the medium segment has been in restructuring or settlement process which amounts to almost Rp2trn (<1% of BBRI’s loan book). These are expected to be resolved in 2H10. Loan loss coverage was relatively unchanged at 146%. Government bonds which comprise only 4.5% of total assets are largely fixed rate (87%), but as the quantum to total assets is small, we are not overly concerned should interest rates start to rise. Total CAR was lower, as loan growth picked up. BBRI could possibly raise sub-debt to fund growth.

Little was said on BBRI’s acquisition of Bank Agroniaga. Further details will be provided once the MoU is signed. To reiterate, we view the acquisition neutral to mildly positive as Bank Agroniaga is a comparatively small bank with total assets less than 1% of BBRI’s total assets.

Recommendation
We maintain our Rp11,100 TP based on the Gordon Growth Model with the following assumptions: 28% sustainable ROE, Our TP of Rp11,100 implies 3.3x FY11 BV and 12.4x FY11 EPS. BBRI’s prospects remain healthy with strong NIM (albeit declining), and its ROE profile remains among the best thanks to high yield micro loans, which is BBRI’s forte.

JPM Bank Rakyat Indonesia - 2Q results: profits in line, but NPLs continue to build

• Profits flat q/q: BRI’s 2Q PAT grew by 22% y/y, but was flat q/q. The stock slightly declined on Friday trading (after results) but bounced off intra-day low levels. PPOP was stable q/q and down 5% y/y. Net profit was supported by slightly lower provision coverage and a low (17%) tax rate in 2Q. We do not see these results as reason to drive further upside for the stock relative to the market.

• Strong credit growth continues: Loan growth at the end of 2Q continued to be strong at 26% y/y. We are encouraged by the strong growth in micro (Kupedes) and consumer loans, which we see as BRI's core business. Micro lending slipped below 25% of loans in 1Q, but was back at 26% of lending in 2Q. On the corporate side, BRI's loans to SoEs grew by 65% y/y. 2Q saw acceleration in FX loans, which were up 19% q/q, mostly to SoE oil majors.

• Kupedes customer growth recovery resolves one of our longer term concerns: BRI has shown an increase in Kupedes customers of 0.5m over the last 12 months. It now appears that the decline in Kupedes growth was driven by cannibalization from the KUR scheme, and as that has become less of a priority the core business has recovered. We see this as a positive development for our long term view on BRI.

• Further deterioration in asset quality reason for maintaining UW: A further deterioration in asset quality was the major negative to us. As growth returns elsewhere in the sector, we think the focus may move to NPLs and hence retain our UW on the stock. BRI has outperformed the JCI by 7% over the last quarter, neutralizing prior underperformance. We think the rally could be capped from here, and recommend taking profits. We are rolling forward our PT timeframe to Jun11 from Dec10, and adjusting risk free rate to 9.5%), thus raising it in the process to Rp8,500. Key risks are a reduction in NPLs boosting RoE, and strong growth.

DBS TLKM Exit opportunity on good results TP IDR8500

• 2Q10 net profit of Rp3.2 trn (+16% qoq, -2% yoy) is in line with our expectation.
• Non-cellular surprised with earnings up 29% qoq, mainly on account of one-off lower costs.
• Cellular earnings improved 8% qoq, led by healthy 6.4m new subscribers, along the expected lines.
• Maintain HOLD, Rp8,500 TP as we believe that Telkomsel’s revenue share may decline.

Non-cellular earnings growth may not be sustainable.
Non-cellular earnings stood at Rp1240bn (+29% qoq, +54% yoy), thanks to (i) huge decline (-86% qoq, -66% yoy) in G&A costs from lower provision of doubtful accounts and inventory obsolescence; and (ii) significant decline (-15% qoq, -10% yoy) in personnel costs due to higher discount rate for actuarial pension benefits. We doubt if G&A costs can stay at these levels for rest of the year.

Cellular business improved in line with expectations.
Cellular earnings contribution stood at Rp1987bn (8% qoq, - 15% yoy). Subscriber growth was healthy at 8% qoq as Telkomsel gave away free talk time and SMS, after certain threshold amount was spent. However, network congestion took a toll on the call success rate, which deteriorated to 94.7% in 2Q10 from 96.6% in 1Q10, a serious issue for Telkomsel, known for its voice-quality. Telkomsel’s revenue and operating expenses grew 6% qoq each while blended ARPU was stable sequentially at Rp43000.
Telkomsel’s revenue share may decline in our view. In our view, Telkomsel’s 60% revenue share (2009 end) is too high to sustain in the face of two strong competitors. The growing popularity of mobile Internet plans is the key catalyst, helped further by cheap Chinese handsets. We expect Telkomsel’s revenue share to decline below 55% by 2012F with XL Axiata as the key gainer.

Credit Suisse PT INCO - 1H in line; strong QoQ on strong nickel prices in 2Q10

● PT Inco’s 1H10 results are in line with our forecasts at 51% FY10E production and 57% of FY10E net earnings, and 41% of FY10E consensus earnings. 2Q10 revenue increased by 42% QoQ due to higher ASP and deliveries, resulting in an 87% QoQ earnings increase in 2Q10.

● ASP is directly correlated with nickel spots with one month lag – at US$8.3/lb during 2Q10, an increase of 28% QoQ. Higher deliveries in 2Q10 is a result of more shipments in the quarter, up 11% QoQ. INCO’s good cost management led to a 3% QoQ
decrease in unit production costs.

● Despite strong 2Q10 and 1H10 results, we believe they may not be repeated in the following quarters as we forecast weaker nickel prices. Our bearish view on nickel is driven by our expectation of slower growth in 2H10 global production compared to 1H10, leading to slower consumption growth while a supply threat prevails towards the end of the year.

● Our still bearish view on nickel drives our UNDERPERFORM view on INCO. We maintain our target price at Rp3,100 based on 5.5x EV/EBITDA.

A Cup of Tea 01 Aug'10

BASE-METAL FUNDAMENTALS TO THE FORE?
• Global growth momentum has eased, but we see a recovery and not a double dip. We believe the global economic recovery remains on track.
• The International Monetary Fund (IMF) even upgraded its forecast for global growth this year from 4.2% to 4.6%.
• Commodities prices are being boosted by the change in sentiment with base metals in particular moving higher on the back of the improved economic outlook and demand after the latest slew of company results. The outlook for commodities is positive on a 12-month plus view.
• The shortterm negative factor came from China PMI. China’s manufacturing grew at the slowest pace in 17 months in July as the government clamped down on property speculation and investment in energy-intensive and polluting factories. The Purchasing Managers’ Index fell to 51.2 from 52.1 in June, the Federation of Logistics and Purchasing said on its website today. That was less than the median forecast of 51.4.
• The slowdown seemed concentrated in heavy industry, partly reflecting a government campaign to close inefficient businesses to meet energy-saving goals. This does not necessarily reflect weakening in the underlying economic fundamentals.
• Next we must watch closely US ISM data.

Nickel
Nickel is a critical ingredient in the production of stainless steel and industrial alloys - the demand for nickel rises directly in step with the growth of emerging economies. The latest International Stainless Steel Forum (ISSF) production data suggests that the nickel market will remain in deficit for 2010 and 2011. The nickel production and sales of China nickel industry keeps growing, with the supply falling short of market demand.

Quote from China Nickel Industry Report, 2009-2010, The Nickel Industry of China is characterized as follows:
• First, China is short of nickel reserve; basic reserve of nickel reaches 7.6 million tons in China, a share of only 5% in global total
• Second, the production and sales of China’s nickel industry showed the sustained growth in recent years; in 2008, nickel output and consumption of China reached 133,000 tons and 320,000 tons respectively, with a demand gap of 187,000 tons. Then in 2009, the figures raised to 216,000 tons and 447,000 tons respectively, a growing demand gap of 231,000 tons.
• Third, China relies upon import of nickel ore and concentrates since its scarcity of nickel resources;
• Fourth, nickel price runs nearly the same in China and the world at large, and it presented the uptrend of fluctuations in the year of 2009;

INCO
INCO reported first half 2010 net profit of $218.78 million rose six fold from $34.58 million due to higher sales. A nickel deficit is likely this year because of a surge in stainless steel demand, supply constraints and falling stocks, but the shortfall is likely to narrow in 2011 as production rises.

Key Points for INCO;
• Continued to focus on increasing the efficiency of its operations
• Integrated business planning
• The Karebbe hydroelectric power generating plant project
• Higher volume production and average selling price

For medium term with better economic and ISM data I believe that the nickel price will higher gradually. I put my target for INCO was idr5145 , INCO EPS @idr 343 (from reuters) and PE’10 @15x (consensus TP was idr5800). Consensus analyst @current was Buy (9), Outperform (3), Hold (3), Underperform (1), and Sell (1).


Bang Juntri
DISCLAIMER: This report is issued by Bang Juntri. Although the contents of this document may represent the personal opinion of Bang Juntri. We cannot guarantee its accuracy and completeness.