J.P.Morgan - BUMI Resources, The saga might not be over

The saga might not be over: Based on news flows from Tempo, Bisnis Indonesia and Jakarta Post, we believe there is a possibility that Bapepam could block the three proposed acquisitions by BUMI. We believe that the “repo”/loan-linked pressure on the group may not have fully eased, which could in turn lead to fresh responses from BUMI. At Energi Mega Persada (an affiliated company of Bumi), three attempts were made to spin off Lapindo Brantas before finally securing Bapepam’s assent. If that is anything to go by, we believe there could be further twists remaining in the saga.

• We value DEWA at about Rp130/share: Based on publicly available information, we estimate that DEWA is worth about Rp130 per share:
46% lower than the proposed acquisition price of Rp240 per share. The proposed acquisition price of Rp240 per share hinges on DEWA’s ability to deliver 25MM tons of coal by FY12 (4.4x the current level of 5.7MM tons). In addition, our estimated fair value (Rp130) is relatively in line with the recent acquisition of another mining contractor, Petrosea (PTRO IJ), by Indika Energy (INDY IJ).

• Sell into strength: We think that if BUMI is made to step back from the acquisitions, it may have a positive impact on the stock price. However, considering our view that there may be further developments on the acquisition front, we would recommend to sell into strength.

• We maintain our UW and lower our PT to Rp580: We maintain our Underweight rating and lower our Dec-09 PT from Rp620 to Rp580. Our PT is based on SOTP valuation with a WACC of 19.9% and a 50% discount to our fair value of Rp1,154. We incorporate the 50% discount to account for potential unfavorable future developments in terms of corporate actions. Risks to our PT are : (1) undervaluation of coal assets; and (2) any kind of corporate action that could unlock a steep discount to the fair value.