Indonesia equity strategy – time to bottom fish
Aditya Srinath & team looked through their stock coverage universe to find trough entry opportunities, in light of the big market sell-off over the past three trading days (down almost 8%). Bottom-up, they identified the six stocks for investors looking to bottom fish:
1. Bank Rakyat Indonesia
BBRI has fallen 11.4% since the beginning of the year – the largest drop among the major banks. Except in FY08 (during the crisis) BBRI has not spent extensive periods below a 2.7x PBV; the stock is currently at 2.8x. 2.7x 12M Forward P/BV translates into an entry price of below Rp9,000. Potential catalysts: BRI is due for a stock split later this month, which may spur retail interest.
2. Bank Danamon
BDMN has fallen 10.5% YTD. BDMN traded down to a 2x P/BV in FY06 (tight liquidity & weak 2W credit quality). It is currently at 2.1x, which was the floor post FY09 rights. We think below Rp5,000 would be a trough entry level. Potential catalysts: BDMN’s 4Q and 1Q results should be key evidence of growth coming back,
but with adequate liquidity and credit quality buffers to protect the RoE trajectory.
3. Indosat
ISAT has fallen 8% YTD, representing 2% underperformance relative to the JCI. ISAT is still trading at close to peak valuation levels of 20x due to expectations of operational turnaround in 2011. We note we are 24% ahead of street expectations for 2011 EPS. We are buyers sub Rp5,000, at which level shares would be at 14x JPM FY11 EPS estimates. We would time entry around 4Q10 results – the street is expecting weak ARPM trends
which we do not expect to materialize...any weakness around the print is a buying opportunity, in our view. Potential catalysts: We see three major catalysts for ISAT shares: 1) greater-than-expected ARPM stability, 2) earnings upgrades; and 3) a potential tower transaction which would reduce leverage and finance expenses.
4. PT Telkom
TLKM has fallen 9.4% on an absolute basis, and 3.6% relative to the JCI YTD. This makes it the worst performing Indonesian telco YTD. TLKM is trading at a mid-range multiple of 10.5x 2011E street EPS, although we note we are 8% ahead of consensus. We expect a floor share price of Rp7,000 based on recent trading pattern, equating to 10x our FY11 EPS forecasts. Potential catalysts Telkomsel network OpEx per minute has been rising YoY for the last two quarters, any turnaround would be positive. TLKM shares will be driven more by clarity on the pricing environment and any management changes, given that current valuations are not distressed.
5. Indofood
INDF has fallen 7.58% since the beginning of the year. Except in FY08 (during the crisis) INDF has not spent extensive periods below a 13.5x P/E; the stock is currently at 13.1x. 13.5x 12M Forward P/E translates into an entry price of below Rp4,720. Potential catalysts: INDF is due to report in Mar-11; margin expansion could spur interest and vice versa.
6. Perusahaan Gas Negara
PGAS has fallen 7.82% since the beginning of the year. Except in FY08 (during the crisis) PGAS has not spent extensive periods below a 12.6x P/E. The stock is currently at 13.2x. 13.2x 12M Forward P/E translates into a trough entry price of below Rp3,950. Potential catalysts: A price increase in 2Q11, and the appointment of EPC contractors and start of construction of LNG terminals in 2H11 could rerate the stock.
Indo telcos: from regional stand-point
James R. Sullivan and Vishesh Gupta see good entry opportunities for ISAT at current levels, TLKM 3-5% below current levels, and EXCL 9-10% below current levels. We continue to rate all three OW. This report serves as a companion piece to today’s Indonesia Equity Strategy.
Figure 1. Indosat looks extremely cheap on cash P/E, which takes-out its exaggerated depreciation expense bill. Tower sale could help address such issue.
Cash P/E 2010 2011
TLKM 5.4 4.9
ISAT 3.7 3.3
EXCL 6.7 4.9
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