Event
We reiterate our Underperform recommendation on Bumi and our target price of Rp500. However, we are cutting our fair value to Rp2,350 from Rp2,450 on the back of our global coal price forecast cuts.
Impact
Trimming short-term forecast. Our global commodities team has fine tuned its forecast for the 2009/10 annual contract settlement to US$ 70 and US$65 from US$75 and US$70, respectively. The 2009 revision is to reflect the recent Japanese settlement. In 2010 the downside risk is around the expected spot price weakness, combined with the depreciation of the rouble, which has shifted down the top end of the cost curve from US$70–75/t to US$60–65/t.
A world-class asset ex-BHP/Rio. This is evidenced by its strong production track record, low transportation distance leading to low production cost, huge and reasonable reserves and resources quality. Hence, we continue to believe that the company is well positioned to increase its production to 60mt in 2009 and 100mt longer term.
High pricing risk in 2009. As of currently, the company has only priced in 25–30% of its 2009 production (as part of the last year legacy contracts). This will likely lead to significant earnings risk given the potential for coal price volatility.
Corporate governance concerns. We continue to express our concern over the controlling shareholders not acting in the best interest of the company or minorities, especially given the three recent acquisitions, which we believe were overpriced. We highlight the risks if expensive acquisition sprees continue, which may lead to a deterioration of future FCF.
Face-value valuation appears attractive. On face value, excluding the corporate governance concerns, the shares are trading at a 3.3x PER, 2.7x EV/EBITDA and 9% dividend yield on our 2009 forecasts. However, should the corporate governance issues remain an overhang, we highlight the risk that the company could re-rate downward to a 2x multiple.
Earnings revision
We have downgraded our 2009/10 earnings forecast by 6% and 18%, respectively, to reflect our lower coal price assumptions.
Price catalyst
12-month price target: Rp500.00 based on a DCF methodology.
Catalyst: Increasing production, coal price recovery and cancellation of related party transactions.
Action and recommendation
We reiterate our Underperform recommendation on the stock with a Rp500 target price due to corporate governance issues.
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