Macquarie Bumi Resources Stars starting to move into alignment

Event

We reiterate our Underperform recommendation on BUMI, but raise our price target from Rp500 up to Rp2,000 per share. We see operations improving and an increasing alignment between Bakrie and minority interests.

Our global commodities team has marginally increased its thermal 2010 forecast from US$65 up to US$70 per tonne.

Impact

Improving thermal coal outlook, but already reflected in forward coal market. We see our medium-term supply/demand balance tightening; however, this is more than reflected in the current forward curve with coal trading US$90-100/t in 2011. Further, we are more cautious on the coal price in the near term, as we do not believe the Chinese import arbitrage works.

Operations are improving, as evidenced by the recent month’s production hitting a 60mt annualised run rate, and progress in restructuring the Darmahenwa (DEWA IJ, Rp235, NR) transaction. Bakrie’s debt problems appear to be more behind than in front of them. Whilst the financing structure is exceptionally vague, the company appears to have refinanced it debts. We are encouraged that Adaro has been able to
redeem its US$100m Re-capital (a Bakrie-related broker), which is a sign that the "REPO" issue is behind them. Further, Bakrie could benefit from a strong SBY victory. Should SBY win the first presidential election outright, there is a possibility that Kalla could be pressured out of the Golkar party. Bakrie could step in, to be the head of Golkar, and therefore get a seat on the cabinet.

Raising valuation, but too stretched to chase. We upgrade our valuation from Rp500 to Rp2,000 per share, as we think (and hope) that other related party transactions are behind us. However, with the stock trading on 18x PER in 2010, we think it is the wrong time to be chasing the stock price.

Earnings and target price revision
We upgrade 2009 and 2010 net profit by 10% and 18%, respectively, based
on higher prices, slightly lower cost and lower effective tax rate.

Price catalyst
12-month price target: Rp2,000.00 based on a DCF methodology.
Catalyst: Indonesian elections; coal prices; BNBR financing clarification

Action and recommendation
We reiterate our Underperform recommendation, but highlight that this stock will never be for those fund managers who do not believe that corporate governance is in the price. For those that do, however, we think Bumi will be a key beneficiary of increasing coal prices in the medium term.