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Region: Indonesia
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Fundamental View
AS OF 08 Jun 2023- Bank Rakyat Indonesia (BRI) is rated Baa2 (sta)/ BBB- (sta)/ BBB (sta). As the second largest bank in Indonesia that is majority-owned (53.19%) by the Indonesian government, and key role in servicing the ultra-micro and micro segments, we expect a very high likelihood of government support in times of need.
- BRI’s credit strength had been its very high margins (>7%; rose after consolidating Pegadaian and PNM) and capital buffers (>20% CET 1 ratio) which are ahead of its country peers and among the highest in APAC.
- The bank has a leading franchise in the country’s micro and small commercial segments with a long operating track record, well managed credit costs and that has in turn helped to support its high margins.
Business Description
AS OF 08 Jun 2023- The history of Bank Rakyat Indonesia can be traced back to 1895. It is now the second largest bank in Indonesia by assets.
- BRI was listed on the Jakarta Stock Exchange in 1992, now the Indonesia Stock Exchange in 2003. The Indonesian government held a 53.2% stake in the bank as of end-December 2022. Foreign investors hold 35.7% of the bank's shares and domestic investors 11.1%.
- Its core business focus is on the ultra-micro, micro and small commercial segments, which now account for just over two-thirds of its total loan book.
Risk & Catalysts
AS OF 08 Jun 2023- The Indonesian economy continues to be on good recovery momentum which is supportive for asset quality and loan growth; management targets 10-12% FY23 loan growth and credit costs of 220-240 bp (FY22: 255 bp).
- BRI’s high exposure to ultra-micro and micro (~48% of loans) and small commercial loans (19%) leads to higher credit costs compared to its peers, but the bank is more than compensated by the higher margins generated. We are comfortable with the credit given its very high capital buffers.
- Funding cost pressure is salient, but BRI’s interest margins have been resilient thanks to its increased focus on the higher yielding micro segment so its returns have continued to be strong. It expects a broadly stable NIM in FY23.
Key Metrics
AS OF 08 Jun 2023| IDR bn | FY19 | FY20 | FY21 | FY22 | 1Q23 |
|---|---|---|---|---|---|
| PPP ROA | 4.8% | 4.2% | 4.7% | 5.2% | 5.8% |
| ROA | 2.5% | 1.2% | 1.9% | 2.9% | 3.4% |
| ROE | 17.7% | 8.6% | 12.0% | 17.4% | 21.4% |
| Equity/Assets | 14.6% | 14.1% | 17.2% | 16.0% | 15.3% |
| CET1 Ratio | 21.7% | 20.1% | 26.2% | 24.5% | 23.9% |
| NPL Ratio | 2.80% | 2.88% | 3.00% | 2.67% | 2.86% |
| Provisions/Loans | 2.47% | 3.43% | 3.47% | 2.51% | 2.45% |
| LDR | 88% | 91% | 92% | 87% | 94% |
CreditSights View
AS OF 28 Apr 2023BRI has become the 2nd largest bank in Indonesia by assets, having been overtaken by Bank Mandiri after the latter’s sharia business consolidation. About 48% of its consolidated loan book consists of micro loans and another 19% of small commercial loans, leading to its higher Loan at Risk (LaR) at ~16% of its loan book. While we do not expect a high slippage rate from the LaR book, BRI and its country banking peers have the highest capital ratios in the region (23.9% CET1 ratio for BRI) and are therefore in the position to absorb losses. We like BRI because of its very strong profitability and capital. Spreads are relatively tight but the duration is short. We maintain our M/P reco.
Recommendation Reviewed: April 28, 2023
Recommendation Changed: July 08, 2022
Who We Recommend
Mitsubishi UFJ Financial Group
State Bank of India
Mizuho Financial Group
How may we help you?
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Fundamental View
AS OF 12 May 2023Pertamina enjoys very strong linkages with the Government of Indonesia (GoI) and is assured of extraordinary support in times of distress.
Although it boasts of low leverage levels, the company requires large capex spending which could pressure its free cash flow generation.
Dampened upstream O&G EBITDA margins from moderating crude oil prices could outweigh improved downstream O&G margins, given the upstream business accounts for over 80% of Pertamina’s total EBITDA.
Business Description
AS OF 12 May 2023- Pertamina is involved in a broad range of upstream and downstream oil, gas, geothermal and petrochemical operations.
- In the upstream sector, it engages in the exploration, development and production and supply of crude oil, natural gas and geothermal energy.
- As for the downstream sector, the company carries out refining, marketing and distribution of oil, gas, fuel products and petrochemical and other non-fuel products.
- As of 31 December 2022, its total proved oil reserves stood at ~1,289 mmbbl (mn barrels of oil) and gas reserves stood at ~817 mmboe (mn barrels of oil equivalent). Its average daily oil and gas production was ~967,000 boe per day in FY22. The company owns and operates 6 refineries in Indonesia.
- Under the Public Service Obligation (PSO) mandate, Pertamina is responsible for providing certain grades of motor gasoline, automotive diesel oil, kerosene and LPG at subsidized prices. The subsidized retail price is often times lower than the cost of production, creating a shortfall, for which it receives reimbursements from the GoI.
Risk & Catalysts
AS OF 12 May 2023Pertamina’s profitability is materially affected by volatility in oil & gas prices. Prolonged periods of low oil prices could harm the viability of upstream/E&P projects. As for downstream projects, input costs increase considerably when oil prices are peaking; owing to the rally in crude oil prices, Pertamina saw a contraction in its operating margins in FY21 and FY22. Additionally, since retail prices of certain fuel products are regulated, realized prices may be below its cost of sales.
The company has to initially absorb the shortfall between the regulated retail price and the cost of producing and distributing certain fuel products. However, if the price of crude oil exceeds the price ceiling set by the GoI, the company may receive insufficient subsidy reimbursements.
The company’s capex needs typically remain elevated, which pressurizes its FCF generation.
Key Metrics
AS OF 12 May 2023| $ mn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Debt to Book Cap | 40.0% | 36.2% | 38.5% | 41.2% | 42.1% |
| Net Debt to Book Cap | 21.5% | 22.4% | 18.9% | 21.9% | 12.5% |
| Debt/Total Equity | 66.6% | 56.8% | 62.5% | 70.0% | 72.7% |
| Debt/Total Assets | 30.5% | 26.4% | 28.3% | 29.9% | 30.8% |
| Gross Leverage | 2.1x | 2.2x | 2.4x | 2.5x | 1.9x |
| Net Leverage | 1.2x | 1.3x | 1.2x | 1.3x | 0.6x |
| Interest Coverage | 10.3x | 8.1x | 7.8x | 8.7x | 11.2x |
| EBITDA Margin | 15.9% | 14.9% | 19.9% | 16.0% | 16.7% |
CreditSights View
AS OF 16 May 2023We upgrade Pertamina to Market perform from Underperform. We think Pertamina should trade 30 bp tighter than Indonesian SOE PLN as Pertamina’s lower net leverage and less material ESG concerns (PLN is still largely a thermal coal power producer) outweigh a weaker FY23 upstream oil price outlook. As the spread differential has narrowed to 27-42 bp tighter (from 60-87 bp tighter on 9 Dec 2022 when we downgraded Pertamina), we think valuations are now fair. We remain comfortable with Pertamina’s credit profile aided by its strong government backing. While cooling Brent crude prices could dampen upstream margins, we think its solid credit metrics (FY22: 1.9x/0.6x) provide elbowroom for modest deterioration. Capex typically remains elevated and in excess of its operating cash flow generation.
Recommendation Reviewed: May 16, 2023
Recommendation Changed: May 16, 2023
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
How may we help you?
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Fundamental View
AS OF 12 May 2023Perusahaan Listrik Negara (PLN) enjoys extremely strong ties with the Government of Indonesia (GoI) and is assured of extraordinary support in times of distress, given its policy role.
PLN’s FY22 revenues and EBITDA grew resiliently from strong post-pandemic power demand recovery across Indonesia. Credit metrics improved, aided by curtailed capex.
PLN incurs significant capex spending requirements as the GoI has entrusted the company with the responsibility of fully electrifying the country. In turn, we expect FY23 capex to rise YoY.
Being primarily a thermal power producer, PLN may be viewed unfavourably from an ESG perspective.
Business Description
AS OF 12 May 2023- PLN is involved in the entire electricity value-chain, from power generation, to transmission, distribution and retail.
- It alone accounts for 76% (~47 GW) of Indonesia's generation capacity (of which 8 GW is renewable capacity), while IPPs provide the remainder.
- The company controls and operates the entire transmission and distribution network in the country. It is the sole buyer of electricity produced by IPPs, through power purchase agreements (PPAs).
- It sells electricity to well-diversified off-takers – 41% to households, 25% to industrial customers, 21% to businesses and 12% to others.
- Since 2015, the GoI has gradually implemented monthly tariff adjustments for 13 customer groups, so that rates charged to customers are better matched with production costs.
- However, under the Public Service Obligation (PSO), the company will continue to sell electricity at subsidized rates of 50% to 450-volt amperes (VA) power households and 25% to 900 VA power households. The GoI subsequently reimburses the company for the difference between the subsidized tariff rate and production cost, typically within 2-3 months.
Risk & Catalysts
AS OF 12 May 2023The company provides subsidized electricity to certain households for which it subsequently receives reimbursements from the GoI; though these payments tend to get delayed during the general elections period or other major events (e.g. COVID-19 pandemic).
In order to increase the country’s electrification ratio to 97%, the company had been mandated by the GoI to develop large electricity capacities through the Fast Track II and 35,000 MW Programs. Implementation of such complex programs has required significant capital expenditure, which has led PLN’s FCF to fall deep into the red in recent years and created a funding gap.
The success of the above programs is also contingent on the company’s ability to source coal cheaply, select quality contractors, acquire land rights and receive adequate subsidy reimbursements from the GoI.
Being primarily a thermal power producer, PLN may be viewed unfavourably from an ESG perspective.
Key Metrics
AS OF 12 May 2023| IDR bn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Debt to Book Cap | 29.1% | 32.5% | 32.2% | 29.7% | 28.9% |
| Net Debt to Book Cap | 26.5% | 29.1% | 28.2% | 26.9% | 25.2% |
| Debt/Total Equity | 41.1% | 48.1% | 47.4% | 42.2% | 40.7% |
| Debt/Total Assets | 25.5% | 28.2% | 28.1% | 25.7% | 24.6% |
| Gross Leverage | 5.7x | 5.6x | 5.5x | 5.0x | 4.2x |
| Net Leverage | 5.2x | 5.0x | 4.8x | 4.6x | 3.7x |
| Interest Coverage | 2.3x | 2.6x | 2.5x | 3.2x | 4.3x |
| EBITDA Margin | 24.5% | 27.8% | 29.0% | 28.0% | 30.1% |
CreditSights View
AS OF 12 May 2023We have a Market perform recommendation on PLN. Its bonds trade 27-42 bp wider than Pertamina’s bonds, which we see as fair given PLN’s poorer net leverage and higher ESG concerns. We like PLN’s defensive business model, aided by its strong state support, robust tariff framework that assures an annual predetermined rate of return, and insulation from elevated thermal coal input costs. However, capex needs have historically been high to drive the Government’s long-term intention of fully electrifying the country; we expect FY23 capex to be higher YoY. We expect its credit metrics to remain largely stable in FY23 (FY22: 4.2x/3.7x). ESG-conscious investors may shy away from PLN given it is primarily a thermal coal power producer.
Recommendation Reviewed: May 12, 2023
Recommendation Changed: October 17, 2019
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India