CLSA INDO: BUMI upgrade, from SELL to UPF

Research Today: BUMI upgrade, from SELL to UPF

Finally.…,, Olie upgrades his rating on Bumi (BUMI IJ) from SELL to Underperform. His new TP is Rp1,700 (from Rp650). The new TP is based on blended valuation: 1x 2010 NPV, 11.5x P/E, 6x EV/Ebitda.

Olie has been too conservative on his BUMI call. But the call was somewhat understandable given the situation back then and BUMI’s massive debt addition to buy non-core assets. Big-hearted enough, Olie just admitted that he was wrong on the call. The stock rallied 140% in the past 2 months.

When Olie downgraded the stock, it felt that the world was about to be falling off the cliff but now the growth, esp in Asia, seems stabilizing. China is increasing strategic stockpile of commodities, possibly including coal. In fact, it looks more and more likely that China will be net coal importer this year .

Key points from the report:

So, what we have missed?
Limited downside risk: debt problem gradually resolved.
Massive fund inflows particularly from local retail investors.
Some values from recently acquired assets.
Potential to recoup investment in Recapital, market recovery.

What about now? Catalyst?
Unlikely near term earnings surprise. More probably medium term earnings outlook should commodity prices continue recovering.
Monetization of non-coal assets: Dairi Prima lead and zinc project.
Balance sheet de-leveraging story? Unlikely.
New investors step into the company? Not sure about this.

BUMI is one the coal companies most leveraged to thermal coal recovery given its export portion. For every 1% increase in benchmark coal price, BUMI’s earnings will go up by 4-5% in 2010 and 2011.

Valuation: massive valuation discount to peers has disappeared and BUMI is now trading at par with peers. No longer THAT cheap, hence the UPF recommendation.