Sector and Company News - UBS Indo

Cigarette industry: Tobacco supply squeezes small players
Kontan newspaper reports that the domestic tobacco industry is supply constrained due to the last year’s weather’s impact on tobacco crops. Industry association Gappri reports that the tobacco industry needs 240,000 tons of tobacco per year while the national tobacco production only able to supply about 150,000 tons to 180,000 tons of tobacco.

Sales comment: This is good news for industry stalwarts Gudang Garam (GGRM Buy PT 53,500) and HMSampoerna (HMSP Not Covered).The large players typically carry 2 years of inventory and receive preferential treatment from the tobacco supply chain while the tight market heaps pressure on the thousands of small producers, already under pressure from more vigilant enforcement of excise taxes. A poor tobacco crop hastens consolidation of market share with the large players.

Bank BRI (Buy PT 7,000): Conference call summary
Banks analyst Joshua Tanja hosted a conference call summary with Bank BRI management on Friday, following their stronger than expected 2010 earnings announcement. Summary as follows:
· Management highlighted that their 2011 NIM guidance of 9%(from 10.7% in 2010) would have been 30bp lower if it is not for the accounting changes.
· The market is currently divided - those that think the accounting change is a one-off, and those that think the IFRS changes are for good and push BRI for a major rerating. Management guidance of 30bp higher NIM suggested a re-rating but not a major one.
· Other forward looking statements: They want to achieve 22% loan growth, of which the small and medium segment targeted at 15% while the micro and consumer targeted at 25%.
· Management is proposing a lower payout ratio and will keep low cost fund ratio at 60% and that they will still be in branch expansion mode until 2012.

Sales comment: After an 8%+ two day rally, most of the good news is in the price at BBRI and after a similar surge at BMRI, we’d look to BBNI to play catch up.

Bumi Resources (BUMI Sell PT 2,800): Targeting US$5-5.2 bn in 2011 revenue
BUMI is targeting to grow its revenue by 13.6-18% to US$5-5.2 bn, supported by 10% coal production growth to 66 mn tons in 2011. BUMI is also forecasting an ASP of US$77-80 per ton for 2011, 8.5-12.5% higher compared to 2010. In addition, BUMI is planning to pay its creditors US$700 mn this year as part of its deleveraging plan. US$600 mn will be paid to China Investment Corporation (CIC) in October, which will be sourced from internal cash.

Sales comment: We are neutral on the coal sector in the short-run, but remain bullish in the long-term.

Medco Energy (MEDC Buy PT 4,800): Allocating US$300 mn for 2011 capex
MEDC is allocating US$300 mn for 2011 capex, which will be funded through internal cash and bank loans. Previously, the company was considering issuing US$300 mn convertible bond in Q111 to finance, among others, Blok A gas project in Aceh and Senoro gas project in Central Sulwesi .

Sales comment: Investors are focused on MEDC’s problems with their Libyan assets. Analyst Sebastian Tobing estimates MEDC fair value at Rp3,800 per share without the Libya assets. We believe MEDC share price is overshooting on the downside in the market, though we will be waiting for the shares to be oversold before entering into the counter.