Thursday, November 3, 2016

Mandiri Bank (PPERY) by Nick Christman: “Will this state owned Indonesian-based holding company thrive in the long-run?"

PT Bank Mandiri (Persero) Tbk ADR (PPERY, $8.69): “Will Bank Mandiri Continue to Run Despite Weaker than Expectation Results?”
By: Nicholas Christman, AIM Student at Marquette University
Image result for mandiri bank

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Bank Mandiri (OTC:PPERY) is a state owned Indonesian-based holding company that operates in the commercial banking sector. The bank was formed in 1998 during the Asian Financial Crisis, when the Indonesian government consolidated four large, struggling banks.
• Mandiri’s stock price has been one of the top performers in the international portfolio returning 26.2% in the last six months.
• Despite strong stock performance, YoY net income has decreased each of the last six quarters as loan loss provisions have come up on higher costs of credit.
• Mandiri’s performance can be explained by the improving macro factors affecting the future forecast for earnings and net interest margins.
• Improving legacy credit costs and asset flows on the recent repatriation bill will continue to boost the stock despite the recent weaker quarterly results.

Key points: Several factors have driven Bank Mandiri’s outperformance in the AIM International Equity. The recent turmoil in the UK and global interest rate slump has driven strong inflows into emerging market investments. The strong inflows have stabilized the Indonesian rupiah, which had been a recent economic headwind for the country. The strong inflows have allowed the government to get ahead of schedule with bond issuances, with expected full year issuance targets to be reached in November.

Mandiri has also benefitted from the tax amnesty program that allowed citizens to bring assets back to Indonesia for reduced tax rates and penalties. The program has added $7 billion to the state revenue and many of the assets are expected to end up within the state-owned bank network. The recent efforts of President Jokowi to reform the tax code to attract foreign investment will continue to be long-term structural tailwind for Bank Mandiri.

Despite weaker than expected results, Bank Mandiri has focused on reducing their portfolio credit risk by focusing on risk management. Two near term negative results has been lower loan growth than peers and higher loan loss provisions. August loan growth was 9% YoY and provisions were 86% higher YoY. These two negative affects are expected to be a near-term pain that will bring long-term success.

Based on comments from a recent management non-deal roadshow, there are several reasons to continue to be optimistic about the future of Bank Mandiri. The bank has several channels of through which efficiencies can be created. First, the bank will be focused on a lower yielding lower risk portfolio to manage risk. Second, digitalization still remains the biggest opportunity for Bank Mandiri, and the expansion of Indonesian infrastructure will only aid this process. Lastly, they can focus on making their country-leading payroll more efficient by improving technology within their branch network.

What has the stock done lately?
Bank Mandiri’s US ADR has returned 17.24% in the last three months, and their performance can somewhat be explained by the rebound in demand for emerging market equities. The additional outperformance is likely result of the strong underperformance of the bank in 2015 and the first half of 2016. The stock has stayed relatively quiet in recent weeks, as investors wait for better financial results before feeling comfortable with a higher price.

Past Year Performance:
Bank Mandiri share price has increased 22.66% in the past year, and paid a $.20 dividend per share. The positive economic and political backdrop in Indonesia has been a significant driver return for the company. With the Indonesian Rupiah strengthening 4.67% over the past year, the countries financial system has benefitted from the reduced stress from currency depreciation.

 Source: FactSet

My Takeaway
Bank Mandiri represents an important investment in the AIM international portfolio because it’s one of the few pure-play emerging markets investments. The company has a bright future with significant opportunities to take advantage of strong net interest margins (between 5.4%-6% for the last 12 months), the build out of the Indonesian financial system and economy as a whole, and strong inflows caused by governmental incentives to bring back offshore assets.