In this briefing:
- BDMN/BBNP Merger Leads to BDMN Buyout Arb
- The Week that Was in ASEAN@Smartkarma – Asia’s Time, Indo Mini-Marts, and Singapore Property Woes
- Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges
- Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low
- Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town
1. BDMN/BBNP Merger Leads to BDMN Buyout Arb
In December 2017, Mitsubishi UFJ Financial (8306 JP) launched a complicated three-step process to acquire up to 40%, then up to 73.8% (or more) in Bank Danamon Indonesia Tbk (BDMN IJ), five years after DBS’ aborted attempt to obtain a majority in the same bank.
This was discussed originally in Pranav Rao’s Bank Danamon: Takeover Redux.
MUFG initially bought 19.9 percent of Bank Danamon from Singapore state investor Temasek Holdings 15.875 trillion rupiah ($1.17 billion), then valuing the Indonesian lender at around $6 billion.
Step 2 saw the OJK give the OK (BDMN announcement in English) for MUFG to up its holding to 40% – the statutory maximum under the prevailing OJK regulation No.56/POJK 03/2016 – and the Indonesian Financial Services Authority (OJK), seemingly granted permission for MUFG to go above 40% in Bank Danamon when OJK deputy commissioner for banking, Heru Kristyana, wrote in a message to a Reuters journalist (article here) on August 3rd last year “They (MUFG) can have a larger stake than 40 percent once the merger (with Bank Nusantara) has gone through and as long as they meet provisions and requirements.”
As Johannes Salim, CFA pointed out in his interesting insight Bank Danamon: Fundamentals Revisited Plus Thoughts on M&A in March last year, the revised OJK regulation No.56/POJK 03/2016 placed the authority for determining whether or not a foreign acquiror could go above 40% squarely on the OJK – no BI approval would be necessary.
Indonesia has a “Single Presence Policy” (OJK Regulation No. 39/2017) which requires that a foreign owner may not hold more than one control stake in a bank. In order to get to Step 3 which would be to acquire the remaining 33.8% of Danamon from Temasek affiliates (Asia Financial Indonesia and its affiliates), MUFG would need to merge its presence in Bank Nusantara Parahyangan (BBNP IJ) (also known as “BNP”) where it holds more than three-quarters of the shares (and has controlled since 2007) with Danamon.
The New News
This morning’s paper carried a giant notice in bahasa announcing the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019. The Boards of Directors and Boards of Commissioners of each bank
- “view that this Merger will increase the value of the company because it is a positive move for stakeholders, including the shareholders of Bank Danamon,” and
- “have proposed to their shareholders to agree with the resolution on the proposed Merger in each of their respective GMS.”
Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. In addition, the structure of such takeovers creates short-term options (for holders) and possibly longer-term obligations for the acquiror which are a little unusual, but provide for a very interesting opportunity in this case.
There is a trade here.
2. The Week that Was in ASEAN@Smartkarma – Asia’s Time, Indo Mini-Marts, and Singapore Property Woes
This week’s offering of Insights across ASEAN@Smartkarma is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
Macro Insights
In Ten Years On – Asia’s Time Is Coming, Don’t Miss The Boat, Sharmila Whelan suggests that the time has come for Asia to outperform developed markets.
In The Black Elephant Has Trumpeted, Dr. Jim Walker argues that we are on the cusp of a period of pronounced outperformance for Asian economies.
In Catalyst Calendar for Thailand 2019, our Thai Guru attempts upcoming catalysts for selective stocks in Thailand including TMB Bank PCL (TMB TB), Airports Of Thailand (AOT TB), Indorama Ventures (IVL TB), Sino Thai Engr & Constr (STEC TB), and Major Cineplex Group (MAJOR TB).
Equity Bottom-Up Insights
In his on the ground insight, Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves, former Jakartan Angus Mackintosh revisits this leading Indonesian mini-market operator. After a meeting with management, he finds the company on an altogether more favourable tack.
In Ayala Corp Placement – Selldown by Mitsubishi Likely to Reignite Overhang Worries, Zhen Zhou, Toh takes a look at this significant transaction in the Philippines.
in Capitaland (CAPL SP): Transformational Acquisition at a Premium, Arun George comments on Capitaland Ltd (CAPL SP)‘s latest acquisition and though he sees it as significant would take a wait and see stance on the stock.
Sector and Thematic Insights
In Singapore Real Deals (Jan 2019 Issue 1, Anni Kum launches a new regular product commenting on significant developments in the Singapore property sector. Singapore Real Deals is a fortnightly property digest that takes you through the peculiarities of Singapore’s real estate market. In the first issue of Singapore Real Deals, she will dive into the first property launch in Prime District 9 in 2019, RV Altitude, to get a sense of the product mix and pricing strategies that developers are adopting in a price-sensitive market.
In Singapore Property – A Perfect Storm for the High-End Residential Market in 2019?, Royston Foo investigates some worrying developments on the supply side in Singapore property, which he suggests could negatively affect the market, especially the high-end.
3. Widodo Prevails in 1st Debate / Reform Discussed / BI Holds Rate / Poll Margins Steady / PSI Emerges
BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes. Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy. Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform. Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation. A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%. Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT.
Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade. Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy. Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants. The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices. Widodo unveiled a plan for a National Legislative Center (Puslegnas). The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2). The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15). Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor. At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16).
Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage points in late December. It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support. The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>. |
Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta. A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).
Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit. In part, the deficit reflects Indonesia’s considerable economic momentum. Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20).
4. Global Banks: Why Buy High Into Popular and Fashionable Banks and Markets? Be Contrarian and Buy Low
Trawling through >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.
While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?
Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.
Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.
Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.
5. Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town
Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt.
The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.
The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.
The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few.
After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively.
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