Mandiri Sekuritas BUMI Higher market tolerance

Higher market tolerance

On valuation metrics, Bumi is the cheapest among its Indonesian peers in EV/reserves, and PE. However, there is a concern on so called ‘corporate governance’. We define ‘corporate governance’ as market tolerance toward perceived unfair treatment. We think this will improve as time passes, and BUMI exercises ‘damage control’ PR campaigns. On DCF basis, applying WACC of 16.7% and cost-of-equity at 20.2% plus its acquisitions priced at NPV of purchase value and using cost of equity as discount rate, we arrived at a fair price of Rp1,056/share. At this price, BUMI is trading at 4.2x 2009F PE and 3.3x 2009F EV/EBITDA, still a steep discount to current 2009F market PE of 9.1x. We’re reinstating our recommendation with a Buy.

Our 2009 forecast vs BUMI’s guidance: lower than company estimates. BUMI expects 2009 coal price at mid-to-late US$60/ton with production cost expected to fall 10% from US$33/ton, a 50% margin. Production and sales volumes are expected to rise by 10%. Meanwhile, we expect 2009 volume sales to increase 6.0% to 54.6mn tons from 51.5mn tons in 2008, with average price of US$58.6/tons, and production cost of US$26.5/tons, or 48.5% margin.

Our 2009 net income: US$433mn, on pretax of US$880mn, with potential upside from lower tax. According to Bloomberg consensus for 2009, Bumi’s pre-tax profit is expected to be US$975mn, with net income of US$429mn. Potential upside surprise lies in a potential reduction of income tax. Currently our esti mates assume 51% income tax, vs. consensus of 56%. The government has reduced corporate tax level from 30% to 28%, and also applied another 5% reduction for listed companies with 40% public ownership. Therefore, we see other potential upside to our estimates if tax rate applied is lower than ours and consensus.

Reinstating recommendation with Buy at Rp1,050/share target price. Our previous ‘Not rated’ recommendation was based on doubt of valuation effectiveness if market is still nervous on perceived unfair treatment to minority shareholders. However, unless other surprises arise, we see signs of stabilization and acceptance. Discount over peers still has to be applied. Our target price of Rp1,050/share, implies a 2009F PE of 4.2x, a 25% discount to its 4 peers (Indotambang, Bukit Asam, Adaro, and Indika) average 2009F PE of 5.6x.