Bank Bukopin, and Acquisitions

Recently I received quite a lot of emails from friends asking about the stock of Bank Bukopin (BBKP). And after I checked, I found out why. Looks like some investors are bought this stock at prices above 700 per share, as influenced by the news that BBKP would be acquired by, if not by Bank BRI (BBRI), then it by Social Security (Jamsostek). Indeed, in August, BBKP stock soared from 640 to 760 because of the acquisition news. But later, BBKP was down and returned to the position of 640.

The cause of the decline is actually quite clear, namely because the management reiterated that they would not be acquired by any company, including BBRI. The management prefer to hold rights issue to augment its low-capital, with the Cooperative of Bulog Employees of Indonesia (Kopelindo, BBKP’ current majority owner) as the stand-by buyer. So BBKP is not being acquired by any company. But then there is news that BBKP cancel its rights issue, and prefer to sell subdebt worth Rp1 trillion to Social Security to increase their capital. I guess this is what makes the company's stock eventually dropped, because the news is confusing. So what they’re gonna do? Rights issue or subdebt? Or another option?

But clearly, BBKP refused to be acquired by any company, and this might be the main trigger of its stock decline, just the same as when the stock of Medco Energi Internasional (MEDC) fell down because it was rumored that Pertamina’ acquisition against the company is canceled. If we check the company’s performance, it is natural that BBKP management refused to hand their 'treasure' to someone else. BBKP’ financial performance in the third quarter of 2010 is fairly moderate, not too good but also not too bad. The problem lies only in the capital, with CAR 12.2% only, so that BBKP must increase their capital. The opportunity was then captured by BBRI which then offers the additional capital in the form of acquisitions. But Kopelindo as the majority owner of BBKP is clearly refuse the offer. Why should we sell the company? It was still profitable!

But when BBRI acquired Bank Agro (AGRO), the process was run smoothly, was not it? Yes it was, but that is because Plantation Pension Fund (Dapenbun) as the owner of AGRO considered that AGRO is not so favorable. So if there is any company that could acquire it and make it a better business, then go ahead! And if we check the performance, AGRO indeed is a poor bank.

If we check further back, a merger or acquisition is a thing that is not so favored by state-owned enterprises, including state-owned banks, especially on the part of the 'oppressed' (acquired). Why? Well, try to imagine that you are the CEO of BBKP, aka the top leader in the company who can ordered this and that. And if BBKP is taken over by BBRI, then you are no longer a CEO, because you now have a boss, maybe some bosses: the guys from BBRI. Are you willing? I do not think so. Similarly, the board of trustees and directors, they might lose their jobs. That’s why when four state-owned banks, namely Bank Mandiri (BMRI), Bank BRI (BBRI), Bank BNI (BBNI), and Bank BTN (BBTN) had proposed to do merger on the grounds of efficiency, the board of directors simultaneously rejected the idea. Although the state as the owner of the state-owned banks should have the power to enforce the merger, but usually it just become a bargaining chip for the relevant state officials, against the officials of these banks.

The story will be different if the bank have poor performance, so that the management should receive the idea (of acquisition/merger) to improving company’s performance. This once happened in 1998, when there were four banks whose performance is devastating because of the monetary crisis, and they eventually merged to become a big bank, Bank Mandiri.

Back to our problem of BBKP. How does the fundamental? At a price of 640, BBKP’ PER was only 8.7 times, and its PBV is also only 1.4 times. It should be undervalue then? Yup, it's relatively undervalue. Although BBKP perfomance is not as good as BMRI, for example, but it is still pretty good. Rating performance in the third quarter of 2010 was BBB. The problem is, as already mentioned above, BBKP’ net capital is a bit too small compared to the total assets, so BBKP really need additional capital at least Rp1 trillion or about US$ 100 million. Since the acquisition seems not possible, then the more likely is the right issue, which means the share of BBKP will be diluted. Perhaps this is also another thing that was feared by investors, so eventually the stock is dropped.

But in the long run, I suppose that the stock will rise again. Because the additional capital will give a positive effect for BBKP to expand, and the dilution  effect would not be too big. Here’s rough calculation: If the value of right issue is Rp1 trillion, and the price per share of 500  then the number of BBKP shares will increase by 2 billion pieces. Today, the number of shares of BBKP is 6.1 billion pieces, so there will be a total of 8.1 billion shares. If based on BBKP’ current net profit that is Rp336 billion, then the PER would be 11.6 times. Still relatively low, right? The average PER of the banking sector at the moment is 15 - 17 times. And of course the net profit of BBKP in the future will likely increase along with the steps of expansion after obtaining additional capital. So that the PER could be smaller.

So, if you bought this stock at its peak price and then got stuck, just relax. Trust me, in the long term he will rise again to go back to 700 or even more, could be 6 or 12 months from now, of course if the JCI movement was normal. But if you can not hold for that long, then you may do the cut loss. BBKP may not rise in the near future, because in addition to its current negative sentiment, its rights issue process would still take time.

Original article was written at December 7, 2010.