Optimizing Synergy with Bank Mandiri, Boosting Tunas Ridean earnings

Since Bank Mandiri (BMRI) took 51% ownership of Mandiri Tunas Finance (MTF) from Tunas Ridean (TURI) in 2009, MTF’s outstanding consumer receivables have almost tripled to IDR8.2trn at end-2011 from UDR2.9trn as at end-2009. However, the loans growth did not translate into higher net income due to rising provisions and contraction in margin. The good news is for 2012, the company expects to turn the tables and start to see profit growth, which should also benefit TURI.

We see MTF FY12 earnings growth to be strong, given its (i) positive synergies with BMRI, (ii) better net interest margin, and (iii) higher portion in joint financing. Notably, MTF contributed around 10% of TURI earnings/profit/sales. MTF will add around IDR21bn, or equal to an additional 6% growth in contribution, to TURI’s FY12 income.

Business overview
MTF is mainly engaged in 4W financing, with new cars as a major business. Starting from 2H11, it decided to reduce its portfolio in 2Ws to improve its asset quality, with Lampung as an exception considering TURI’s strong presence there. MTF expects 35% growth for new loans this year, higher than the Financing Company Association’s expectation of 20% for the industry overall.

Extracting synergy
The several steps taken to optimize synergy are: i) Referring BMRI’s automotive financing credit account to MTF, which is already being implemented; and ii) creating point-of-sales at BMRI branches. Since the takeover date, MTF has added 35 branches from 33 at end-2009 to 68 as at the end of 2011. As the number of branches is now sufficient to cover the major areas, MTF plans to pause on branch openings to focus on setting up point-of-sales at BMRI branches. This move will reduce its capital expenditure as well as general administration expenses, and iii) create an integrated database between BMRI and MTF (plan for 2012).

Better net interest margin
MTF expects net interest margins to improve  this year. This will come from lower cost of funds considering the its medium term notes I (11.6% interest rate; IDR250bn nominal value) matured in November last year, while its medium term notes II (11.6% interest rate, IDR350bn nominal value) will mature this month. The two MTNs account for 20% of its total interest bearing debt in 9M11. MTF expects its new loan facilities cost to be below 10% this year.

Higher joint financing
MTF expects a bigger portion of joint financing of 85% for new loans this year (compared to the current 52% JF portion in outstanding loans). The higher JF portion should lower the need for provisions in nominal terms, which may result in a one-time gain on provision reversal.

Positive impact on TURI
Management expects this year’s net income to reach IDR105bn (+68% from FY11 annualized net income at IDR63bn), which does not include a potential provision reversal. Considering TURI’s 49% ownership, MTF will add around IDR21bn, or equal to an additional 6% growth in contribution, to TURI’s FY12 income (versus an FY11 annualized net income of IDR324bn). While not providing guidance, TURI has indicated that its core performance will grow at more or less the same pace as that in the domestic automotive industry.

Applying 7.5% growth for its core business (OSK’s assumption for 4W domestic growth in 2012), a rough estimate shows that TURI is trading at 10.6x FY12 PE, which is far below those of its domestic automotive peers. However, its size and business line is much smaller than those of its peers.