Danareksa BUMI (TP Rp1,200) - Danareksa: Earnings upgrade

Higher 2009-10F earnings forecasts
We have raised our 2009-10F earnings forecasts by 49%-23% due to: (1) 8-7% lower 09-10F production cash costs, (2) 36%-66% lower 09-10F interest expenses, and (3) a lower tax rate of 30% vis-à-vis our previous forecast of 45%. These three positives shall offset the impact of 17%-20% lower 09-10F coal benchmark prices.

Lower effective tax rate
The effective tax rate is much lower than our expectation since BUMI still had tax losses carried forward in 2008. However, the company will not enjoy such large tax benefits in the future (note that BUMI’s quarterly effective tax rate rose to 25% in 4Q08 from 14% in 3Q08. We now believe that the tax rate will normalize at 30% (this is lower than our previous assumption of 45%).

Gearing set to decline going forward
BUMI’s gearing did increase to 105% by the end of 2008 due to the acquisitions of Fajar Bumi Sakti and Darma Henwa. Looking forward, however, we believe that gearing will head lower – even after taking into account the acquisition of Pendopo. We expect the gearing to decline to 59% at the end of 2009 and to just 35% at the end of 2010 assuming: (1) sufficient operational cash flows in 2009-10, (2) no share buybacks in 2009, and (3) a 12% dividend payout ratio.

Maintain BUY, TP of Rp1,200
We have raised our TP to Rp1,200, reflecting lower gearing and stronger-than-expected cash flows. While recognizing that some issues – principally the ongoing investigation by the capital market authorities into the acquisitions – are still overhanging, we consider our assumptions to be conservative since we do not incorporate any incomes contributed by these assets into our forecasts. Our TP implies 09-10F PE of 4.6x-6.2x.