Dec 6, 2010

UBS most preferred & least stocks

In a report published December 1 2010, UBS Investment Research provided seven most preferred stocks and three least preferred stocks. Here is the summaries:

Most preferred stocks:
Bank Negara Indonesia (BBNI) offers a unique efficiency gain story among Indonesian banks. "The bank is strengthening its underwriting standards, which we think should result in lower normalised credit costs, improving its sustainable ROE." 
UBS estimated decent loan growth of about 20% in 2011, but believe it is well positioned to grow above the market in 2012. The settlement of its stock of written off portfolio could be an additional source of book value upside. 
"We derive our price target [IDR4,900] from the Gordon Growth Model. We assume 19% sustainable ROE, a 7.8% risk-free rate and a cut-off date of end-2011." 
What is the catalysts in 2011? Potential signing of the NPL ‘haircut law’ in 2011, the potential increase in interest rates throughout 2011, the potential M&A story with BNI subsidiaries, as the company indicates it has been looking for a foreign partner for its life its recently spun-off Islamic banking subsidiary. 
UBS provided buy rating with price target of IDR4,900 per share.

Semen Gresik (SMGR) is expected to increase its average selling price (ASP) following in line 9M10 results. This should help it increase momentum in the cement sector after weak YoY sales growth and lack of selling price increases. 
The brokerage also believes the negative is already priced in and downside risk is limited, after a 5% downgrade in consensus 2011 estimates. 
The company continues to pay a 5% lower tax rate due to its high free float (48% as of 2010). The company is also on track for its 30% capacity expansion by end-2012. 
"We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our price target is Rp10,900." 
What is the catalysts in 2011? Average selling price increase, capacity expansion, regulatory environment, Rupiah fluctuations. UBS provided buy rating with target price at IDR10,900.

UBS views Indofood Sukses Makmur (INDF) as the most compelling long-term play on Indonesia’s consumption story, not only in instant noodles but other consumer goods, including dairy products. 
It dominates the instant noodle market in Indonesia, with a 73% share as of 2008 (the latest official statistics). In 2009, the company had a 38% share for sweetened condensed milk and a 22% share for UHT milk. 
The company has one of Indonesia’s widest distribution networks, with 275,000 points of sale across the country. It is vertically integrated, with the flour mills and its CPO plantations. 
"We would view the share price correction over the previous 8 weeks as a potential buying opportunity, as Indofood benefits from rising commodity prices since it is a net seller of CPO and has proven pricing power in the noodle business." 
UBS derives the price target using a sum-of the parts methodology, assuming a 7.8% risk-free rate and end-2011 cut-off date. 
What is the catalysts in 2011? Price increase. Price increases for instant noodle products normally happen once a year in August around the Moslem new year. 
However, there is a possibility of additional price increases if commodity prices remain high; in 2007 for example, the company raised its prices five times by May to cover rising commodity prices. Its competitors followed suit. UBS provided buy rating with target price at IDR5,900 per share.

Delta Dunia Makmur (DOID) is undergoing a turnaround from earnings disappointment to earnings growth, and from stable margin to margin expansion as it delivers higher coal extraction, with management’s track record of delivering results improving. 
Despite the likelihood of tightness in the heavy equipment market, Delta has also pre-ordered and secured its mining equipment. 
"We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our key assumptions are a 7.8% risk-free rate, 20% operating margin in 2011/12E and 43 million/55 million tonnes of contract volume coal and 348/391 million bcm of contract volume overburden in 2011/12E."
What is the catalysts in 2011? Quarterly improvement in monthly operational data, eg more than 3 million tonnes coal extraction, announcement of securing more contracts. There is also potential for M&A activity.
UBS provided buy rating with target price at IDR1,940 per share.

Adaro Energy (ADRO)'s low stripping ratio and high infrastructure quality make it one of the world’s lower-cost thermal coal producers, while its earnings leverage remains high through its 70% export exposure. 
"In the medium term, we expect the company to be one of the sector’s largest cash generators [free cash flow yield] as limited capex is required in order to double production. Its JV with BHP to exploit what could be one of the world’s largest coking coal reserves, in Central Kalimantan, should serve as a strong catalyst for share price growth, in our view."
UBS derived Rp2,700 price target from a 12-month target PE multiple of 16.7x and a WACC of 9.5%, which does not include investment returns from the Maruwai asset. 
What is the catalysts in 2011? Rain and weather conditions affecting production. 
London Sumatra Indonesia, constructive sector view (on CPO price) over the next 5 years, given the expected decline in supply growth owing to lack of land, ageing estates, labour shortages, more cautious expansion and licencing. 
"We specifically like London Sumatra Indonesia for the potential upside on efficiency and growth from the underperforming estates in South Sumatra." 
UBS derived  price targets using a target EBIT/EV of 8%, assuming 4.4/ha yield, US$364/tonne cost, and US$982/tonne CPO price. 
What is the catalysts 2011? "Rising CPO price, we expect an average CPO price of US$982/tonne in 2011. Increase in productivity [tonne/ha] from its estates." UBS provided buy rating with target price at IDR17,400 per share.

Indosat (ISAT) after lacklustre growth throughout 2009 and early 2010, Indosat has begun to execute on its turnaround as evident by consecutive quarterly revenue growth in Q2 and Q310. 
"We expect Indosat to have the industry’s strongest 2010-13 revenue CAGR of 16%, compared to our forecast 10% industry average over the same period." 
There is also scope for margin expansion, as Indosat’s maintenance contracts will expire in 2011 and as the company fills up its network (lowest minutes of use among big Indonesia telcos). 
"We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We assume a 7.8% risk free rate. 2011 catalysts: Quarterly earnings likely to be the most important catalyst." UBS provided buy rating with target price at IDR7,400 per share.

Most least preferred stocks:
Bank Central Asia (BBCA), UBS sees risk of margin compression for Bank Central Asia (BCA) because of two reasons: a) heavier competition from foreign banks on corporate lending as well as rising demand for US$ loans from corporates; and b) rising competition in its low-cost savings products from the three state banks, given the upcoming Bank Indonesia regulation that might open up the ATM network to everyone. 
"We derive our price target of Rp5,822 from the Gordon Growth Model, assuming 25% sustainable ROE and a December 2011 cut-off date." 
What is the catalysts in 2011? If and when Bank Indonesia issues the regulation forcing interconnection among ATM networks. UBS provided sell rating with target price at IDR5,822 per share.

United Tractors (UNTR) has two main businesses heavy equipment sales and mining services; its third business—coal mining is still small. 
"The heavy equipment business is doing very well and we think it is likely to surpass expectations on volume in 2011."
However, mining services could continue to disappointment on both volume and margin, as seen in Q310. "We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool." 
UBS assumes a risk-free rate of 7.8%, with a December 2011 cut-off date. It assumes 26% heavy equipment sales growth to 6,900 units, and low single digit coal extraction growth in the mining services division in 2011. 
"We forecast a low EBIT margin for the division (as seen in Q310), and a flat margin in the heavy equipment division." 
What is the catalysts in 2011? Monthly data on heavy equipment sales and mining services, quarterly margin numbers for the two biggest divisions. Details of the company’s power plant investments in Sumatra.  UBS provided sell rating with target price at IDR23,100 per share.

Indo Tambangraya Megah (ITMG), UBS has a Sell rating for the company due to a material disconnect between the company’s 11-year reserve life and 13x forward PE. 
"In other words, we do not believe the company should trade at 13 years of earnings given an 11-year earnings life. We believe the valuation implies potentially higher reserves." 
UBS remains bullish on thermal coal, with a US$120/tonne contract price forecast for 2011, above the consensus forecast of US$105-110/tonne. 
"We do not believe the market is more bullish than us, and thus we believe ITM’s share price reflects an increase in reserves either from upgrades or acquisitions. With an 11x stripping ratio, we also think a material upgrade of ITM’s reserves is highly unlikely, which makes acquisitions a more realistic outcome." 
However, insufficient infrastructure, lacklustre land reform and high-priced integrated assets could make domestic acquisitions difficult. 
"We derive our Rp44,000 price target using a target PE of 11.2x. Our price target incorporates a 7.5% risk-free rate, 1.4x beta and 15% cost of equity and is in line with the company’s 11-year reserve life." 
What is the catalysts in 2011? Weather conditions affecting production. UBS provided sell rating with target price at IDR44,000. 

Disclosure: No position at the stock mentioned above.  

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