RHB Indonesia Morning Cuppa - 11 August 2016 - (BTN, Regional Plantation)

Good morning,

Bank Tabungan Negara: Limited Downside Risk

We expect limited downside risk from a possible change in the FLPP funding scheme due to BTN’s strong bargaining power and management’s minimum gross margin threshold of 3.8%. We also expect the funding ratio to change to 80:20 (from 90:10), assuming a flat lending rate of 5%. Wholesale funding will likely grow by 14.6% next year, given lower government bond yields, to better match the loan book’s maturity profile. We raise our TP to IDR2,420 (from IDR2,150, 24% upside) as we roll over our valuation to 2017F. BTN remains one of our top picks.

¨ Limited downside risk from FLPP scheme changes. The Ministry of Public Works and Housing (MPWH) has proposed a IDR13trn budget for next year’s Housing Loan Liquidity Facility (FLPP), with government funding reduced to 60% from 90% currently. Despite the significant 41% YoY increase in the FLPP budget, we are not optimistic about the change, as the revised 60:40 ratio would result in a lower gross margin of 2.6%, which is below Bank Tabungan Negara (BTN) management’s minimum guidance of 3.8%.

¨ Two possible scenarios – First, an 80:20 scheme, which would maintain lending rates at 5%, and generate gross margins of 3.7% (slightly below BTN’s target). Second, a 75:25 scheme with adjusted lending rates of 5.5%, generating gross margins of 3.9%. All in, we believe the first scenario to be the preferred option in order to maintain lending rates at 5%. BTN’s dominant position in the subsidised mortgage sub-segment gives the bank strong bargaining power in negotiations with the government, in our view.

¨ To issue more wholesale funding instruments. Given much lower 10-year government bond yields of 6.8% (vs last year’s average of 8.4%), BTN is aggressively planning to issue wholesale funding instruments following the subordinated loans of IDR3trn. In the near term, BTN is expected to issue shelf-registered bond II phase 2 worth IDR3trn, with 3- and 5-year tenures with indicative coupon rates of 8.2% and 8.75%, respectively. All in, wholesale funding (including borrowings) is expected to grow by 14.6% next year, as BTN plans to issue shelf-registered bonds worth IDR10trn within the next two years.

¨ Sustainable earnings growth. Due to a more sustainable business model focusing on the lower mortgage segment, as well as supportive monetary stance from regulators, we anticipate decent earnings growth of 19.8% for next year. In addition, credit cost is expected to remain under control at 64bps as BTN’s mortgages are secured by properties. Based on our sensitivity analysis, every 10bps increase in credit costs would lower earnings by 5%.

¨ BUY maintained, new TP of IDR2,420. We like BTN for its niche business model in subsidised mortgages and expect limited downside risk from potential FLPP scheme changes. We have included asset revaluation of IDR3.0trn in BTN’s equity base in our model. We raise our TP to IDR2,420 (from IDR2,150 24% upside) as we roll over our valuation to 2017F. BUY maintained, with BTN remaining one of our top picks. Key risks are changes in government policies, higher-than-expected cost of funds, higher-than-expected credit costs, and rising building costs which would limit housing supply. (Eka Savitri)

Link to report: Bank Tabungan Negara : Limited Downside Risks

Link to Daily report: Indonesia Morning Cuppa - 110816

Sector Update:

Regional Plantation (Neutral), Restocking Activities + Hari Raya Month = Lower Inventories

Malaysia’s inventory levels fell slightly in July, due to the weaker output during the Hari Raya month and restocking activities at the two main import markets, India and China. We expect inventory levels to start climbing again from next month, however, as we head towards the peak production period. The upcoming 2Q16 results season should see more companies meeting expectations, as most of the negative news should already have been factored in. We keep our NEUTRAL sector call and top picks of KLK in Malaysia, Golden Agri in Singapore and London Sumatra in Indonesia. (Hoe Lee Leng, Hariyanto Wijaya CFA CPA, Christine Chua)

Link to report: Restocking Activities + Hari Raya Month = Lower Inventories

Indonesia Property: New regulation on tax amnesty is positive for the properly

The awaited Finance Minister Regulation (PMK) no. 122/2016 which regulate the tax amnesty’s repatriated funds placement to non-financial instrument (NFI) has just been recently issued. The major points from this new regulation would be the clarity that repatriated fund can also be placed into property, infrastructure and other non financial instruments ie. gold. For this NFI, Banks will be the only institution that will serve as the gateway, in order to optimized the monitoring. One thing that is missing would be rules on Special Purpose Vehicle (SPV), that is still under discussion between Finance Minister and the Directorate General of Taxation, with the rule should be finalised in the near future. (Lydia Suwandi)

Media Highlights:

Corporates

Bank Negara Indonesia aims credit card business to grow by 15% YoY

Ciputra Development achieved IDR3.4trn of marketing sales

Lippo Karawaci raised USD260m from sale of bonds

Astragraphia Xprins is targeted to grow double digits this year

Dua Putra Makmur to expand to East Indonesia

J resources to start exploration in Malaysia

PP Properti plans IDR1.2trn apartment complex in Depok

Waskita Beton Precast aims IDR4.9trn revenue

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