Danamon with target price Rp6,050

Expecting reversal of under performance in the near term

Cheap valuation with a decent dividend yield
In the past two years, BDMN has underperformed the financial index by 40%,
mostly due to competition concerns. But at 10x 2012F PER and 1.5x 2012F PB, it
is cheap, in our view. Post rights issue, we estimate a 21% 2012 EPS growth
(versus sector's 15%) and a net dividend yield of 4%. Indonesia's recent
sovereign rating upgrade could enhance BDMN's ability to raise wholesale funds,
minimising earnings risks and reversing its underperformance in the near term.
However, in the longer term, it continues to face lending competition. Hold

Strong capital and better earnings growth profile
Despite lingering long-term competition risks, we think BDMN could reverse its
underperformance in the near term. After the rights issue, the bank has a CAR of
18% (which is above the sector average of 16%). This should allow BDMN to post
a three-year loan book CAGR of 20% with limited capital risks. Consequently, we
project 2012 EPS growth of 21% (above the sector average of 15%) with a higher
net dividend yield of 4% (double the sector’s average of 2%).

Widening wholesale funding minimises earnings risks
BDMN should benefit more than its peers from Indonesia’s recent rating upgrade
given its high wholesale funding ratio of 16% (vs. major peers’ average of 4% as
of 9M11). We view that the recent upgrade could enhance not only its wholesale
funding, but also lower costs. These factors should help to finance future loan
growth and, hence, minimise its earnings risks.

Target price of Rp6,050; risks: higher/lower loan growth and lending rate
At current valuations, BDMN is traded at more than a 20% discount to its peers
and historical averages. The target price is based on an (ROE-g)/(COE-g) model.
Upside/downside risks are higher/lower loan growth, lending rate and credit costs.

source: Deutsche Bank dated 5 Jan 2012