Macquarie Bumi Resources: FY09 EPS upgrade, sooner or later

There is a set perception in the marketplace that Bumi’s shares have traded up based on “non-fundamental reasons”. Is it really? Listening-in to the management call yesterday (1Q09 results review), I came away with the impression that at some point this year, sell-side analysts will need to recognize that their FY09 (and FY10) EPS estimates are too low. Of the 13 foreign brokers covering the stock, there are 8 Sells, 2 Neutrals, 1 Suspended coverage, 1 Trading-buy, and 1 Buy. I think trading momentum behind the stock may remain positive in the near term.

Consensus is currently looking for US$456mn NPAT for FY09 (P/E of 8.4x) and US$400mn for FY10 (P/E of 11.1x). Adam Worthington & Albert Saputro (Macq analysts) are looking for US$417mn NPAT for FY09 (P/E of 9.3x) and US$200mn for FY10 (P/E of 19.3x). Some sensitivity analysis to Bumi’s FY09 forecast suggests that FY09 NPAT may come in at US$600mn or more (P/E of 6.4x), 31% above consensus and 43% above Macq. The US$600+mn NPAT assumes: (1) 57mn tons output, (2) US$64/ton ASP, (3) US$29/ton cash cost, (4) 25% effective tax rate.

Where are the surprise factors?
1. Cash cost – 1Q09 cash cost came in at US$29/ton, lower than Macq full year forecast assumption of around US$30/ton. This is despite the much higher overburden removal activity (147 Mbcm in 1Q09 vs. 119 Mbcm in 1Q08), or a strip ratio of 13x vs. Macq assumption of around 9x. Bumi focuses more on overburden due to the unusually heavy rainfall, the strip ratio should normalize through the year, resulting in a down-trending cash cost profile.

2. Tax rate – 1Q09 effective tax rate came in at 14%, vs. Macq assumption of 45%. Management said Bumi has used up almost all of its historical tax credits, but guides for an effective tax rate of around 30%. Since the positive tax surprise has been recurring for the last two years, I increasingly think there is something permanent about Bumi’s tax saving structure, perhaps due to its complex corporate structure involving foreign and domestic entities.