Mandiri Sekuritas Bumi Resources: Acquisitions controversy – more palatable on hindsight? (BUMI, Rp2,100, Neutral,TP: Rp1,815)

Today, according to news reports, Society of Valuers (MAPPI) independent valuation report findings, assigned by Indonesian Bourse, will be opened to public. The report will reveal MAPPI valuations on three controversial acquisitions made by Bumi Resources last year. These acquisitions, two in coal mining concessions (Fajar Bumi, and Pendopo Energi), and one in mining contracting (Dharma Henwa) raised public inquiries as they were considered expensive and involved majority shareholders.

But that was then. Since end of 2008, oil price (CL1) surged 58.4% to US$70.7/barrel raising the possibility of improvement in coal price. In retrospective, we think the acquisitions on the two coal concessions are relatively acceptable (please see table below), however we think Dharma Henwa acquisitions was relatively on the aggressive end.

How does it fare to other acquisitions?

Mining concessions. Fajar Bumi was acquired at EV/reserves of US$2.8/ton (Fajar Bumi has reserves of 98mn tons), while Pendopo Energi which is a greenfield low rank coal mining was acquired at US$0.19/ton (Pendopo has 675mn ton reserves). Recent acquisition made by Indika Energi on greenfield medium rank coal mining in West Kalimantan was priced at US$0.12/ton of reserves. As for Fajar Bumi, in recent Coaltrans meeting, the going rate for mining acquisitions was US$6-7/ton of reserves.

Mining contracting. Dharma Henwa was acquired at 7.5x 2008 EBITDA (Dharma Henwa 2008 EBITDA was US$60.9mn). Petrosea acquisitions by Indika was at 5.7x 2008 EBITDA, and Adaro acquisitions of Orchard Maritime Logistics, a coal transshipment company was at 6-6.5x 2008 EBITDA.

We have a Neutral recommendation for BUMI with Rp1,815 target price. At Rp2,100, Bumi is trading at 8.3x PER09F and 5.0x EV/EBITDA 09F.