Bank Rakyat Indonesia - Room for further share price outperformance - Credit Suisse

1. 1Q11 earnings in line with ours but above consensus: BBRI’s 1Q11 PPOP and earnings came in line at 22% and 24% of our forecasts, respectively. But, the 1Q11 earnings were ahead of consensus expectations (26% of consensus’ FY11E). We see room for more consensus earnings upgrades ahead, providing room for further share price outperformance.

2. 1Q11 earnings proves that earnings are sustainable: The 1Q11 performance shows that our thesis that BBRI is able to sustain its earnings after the accounting method change is valid and the fear that BBRI may see sluggish growth or even decline in earnings after the accounting method change is unfounded. Adjusting for the accounting method changes, 1Q11 interest income grew 7%QoQ.

3. Potential for more consensus earnings upgrades: In the past 30 days, BBRI has achieved robust share price return of 13.9% in absolute terms and 10.4% in relative terms with consensus’ earning estimates being upgraded by 12.7%. However, consensus’ FY11 earnings estimate is still 8% below our forecast. BBRI’s above-consensus 1Q11 earnings suggest that consensus remains partly skeptical with the ability of the bank to sustain its earnings, implying potential for further consensus earnings upgrades.

4. Maintain OUTPERFORM: We maintain our OUTPERFORM rating on BBRI given: 1) potential for further consensus earnings upgrade and 2) BBRI’s relatively undemanding valuation. BBRI is trading at the lowest FY11E P/E of all Indonesian banks under our coverage. We increase our target price from Rp7,200 to Rp8,330. Our new target price is based on Gordon’s Growth model, assuming an 8% risk-free rate (from 8.5%) and a 5% market premium, implying 4.4x FY11E P/B, 3.5x FY12E P/B, 15.3x FY11E P/E and 13.3x FY12E P/E.