You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Bank CIMB Niaga

Bank CIMB Niaga (BNGA) caught my attention for the first time in early 2015 when the stock fell from Rp1,400 to 900’s per share, then because the company reported a net income of Rp2.3 trillion in 2014, dropped almost half compared to the previous year, because of the soaring burden of impairment losses. However, at the price of Rp900 per share, the PBV was below 1 times, and it was very cheap considering that BNGA is not a small nor unknown bank, but actually one of the ten largest banks in Indonesia.

Then, as we have discussed here, these impairment losses could arise because of bad loans, where the net non performing loan (NPL) of BNGA in 2014 was nearly 2%, increased from the previous year of 1.55%. So the then assumption, if the company’s management could deal with the problems of bad credit in next year (2015), the impairment losses would going down, profits will jump back, and of course the stock would fly high. But unfortunately in its financial statements for 2015, BNGA suffered greater impairment losses, so its net income dropped further to Rp428 billion only. While the stock? Well, as you might guess, it crashed to as low as Rp500’s per share.

However, because the valuation of the stock was very cheap from the beginning (and it’s getting cheaper), BNGA is still on my watchlist. Finally, at the end of the first quarter of 2016, BNGA reported a net profit of Rp269 billion, which although the numbers are still small (as one of the largest banks in Indonesia, normally BNGA booked net income of trillions of Rupiah), but at least it was better than the previous year of only Rp83 billion. And most importantly, at the price of Rp540 per share, the PBV was only 0.4 times, which is unbelievably undervalued for a company that in fact is a member of ‘billionaire club’ (companies on the Indonesia Stock Exchange with a market cap of US$ 1 billion or more). So that's it: As from May 2016, BNGA became one of our stockpicks, and indeed it later rose to 1,000 in August, scored a gain of nearly 100% within four months.


But why does the stock dropped in the last few weeks? Well, the most logical explanation is because of profit taking. As of second quarter of 2016, BNGA posted a net income of Rp736 billion, which although the figure rose significantly from the previous year of Rp176 billion, but by ROE of only 5%, the company’s overall performance is still not good enough, so normally the stock would not rise further (not yet).

CIMB Holdings Pay Dividends?

But the following events may be related to the stock decline: On June 15, 2016, CIMB Holdings, a company listed on Bursa Malaysia (Malaysia Stock Exchange), announced that they will distribute dividends in specie to its shareholders, in the form of the shares of BNGA. For your information, CIMB Holdings is the parent company of CIMB Group, while CIMB Group itself is the controlling shareholder of BNGA.

Later on July 26, CIMB Group sold 1.4 billion of BNGA shares to CIMB Holdings, at the price of Rp928 per share. By CIMB Holdings, these shares were sold to CIMB Holdings shareholders (ie public investors in Malaysia), but at a cheaper price of Rp504 per share. Because those investors acquired BNGA at a cheaper price than the original cost when CIMB Holdings acquired it from CIMB Group (Rp504 compared to 928 per share), then in this case CIMB Holdings was like paying dividends to its shareholders, in the form of BNGA shares at a discounted price. After this transaction, there are 1.4 billion shares of BNGA that no longer held by CIMB Group, but held directly by public investors from Malaysia.

Then related to these changes in BNGA’ shareholding, does it affect BNGA financial performance or future prospects of the company? Well, of course there is not any effect, because at the end the CIMB Group is still the controlling shareholder in BNGA. About the decline in stock price, usually only because the investors in the Indonesia Stock Exchange had been confused with these corporate actions by CIMB Holdings and CIMB Group, and they are concerned that the transaction would harm BNGA, while in fact it would not.

BNGA Shares Floating

If you look at the structure of shareholders of BNGA, you will find interesting facts: Until the second quarter of 2016, BNGA has 25.1 billion of outstanding shares, of which 24.4 billion shares or 96.9% held by CIMB Group, whereas the rules from IDX clearly states that as a public company, a minimum of 7.5% stake in BNGA must be owned by the public. Therefore, CIMB Group has an obligation to sell some of its BNGA shares to the public, or we call it ‘floating’. But if CIMB Group directly sell its shares to the public investors in the Stock Exchange, the stock price would definitely drop, and in this case the company will suffer a loss because it sold BNGA at a price which far below its book value.

So what is the solution? Well, what if CIMB Group sell its shares to its parent company, CIMB Holdings? In this way the CIMB Group could immediately release BNGA in large numbers (1.4 billion shares at the same time), and the company has nothing to lose because the selling price is quite high at Rp928 per share. By CIMB Holdings, the shares then ‘chanelled’ to CIMB Holdings shareholders at a cheaper price, namely Rp504 per share. So although CIMB Holdings losses some money (because it sold BNGA at a cheaper price than the purchase price), but in this case the company seems to give a dividend to its shareholders, in the form of BNGA shares, in which the shareholders could buy it at a price that below market price.

Thus the transaction of ‘dividend payments’ by CIMB Holdings is actually intended for floating, aka to sell BNGA shares to the public but without having to make its share price fall. After these corporate actions, CIMB Group still holds 91.5% stake in BNGA, while the remaining 8.5% is held by the public, or already comply with the IDX regulations. And because the public ownership of BNGA is now become much larger (increased from 701 million to 2.1 billion shares), then of course the stock will become more liquid, where the movement of liquid stocks will usually be more reflective/in accordance with the company's fundamentals. Actually, some months ago when I interested to buy BNGA (at the price of Rp540 per share), but I was hesitate because of the fact that CIMB Group holds too much shares in BNGA, so that the had to sell BNGA to the public (for floating purpose), and the stock would fall. However, after this transaction, the stock is now become more attractive, because the CIMB Group has fulfilled its floating obligation (so they would not sell the shares anymore).

Okay, then what about the fundamentals of BNGA itself? Well, as already mentioned above, BNGA financial performance in 2016 has began to recover in line with the improvement in the record of bad credit, although, if I may be honest, the fundamentals are still far compared to their best performance in the years 2012 – 2013. The management clearly states that the bad performance of the company in recent years is because of bad loans in the mining sector, due to lower coal prices. However, since the coal prices are slowly but surely started to climb up, then maybe we could say that the difficult time for BNGA is over, and for now we must wait and see if the company could maintain the momentum of its recovery.

While related to the stock price, it was clear that 500’s are the bottom prices for BNGA, and the current price of Rp800’s per share are also still undervalue, but currently there is no fundamental momentum for this BNGA to go higher (the stock already gained more than 60% in relatively short time). So now here's the strategy: If later BNGA dropped once again to Rp500 – 600 per share, you can immediately buy it without the need to wait for the company to submit better financial statements, as that price is already very low (the PBV is 0.4 only). But if BNGA remain in its current position, it will be safer if we wait until the company reported a better net income, probably early next year.

PT Bank CIMB Niaga, Tbk
Rating of Performance as of Q2 2016: BBB
Rating of Shares at 805: A

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