The dilemmas
Owners’ dilemma
Our industry channel check reaffirms our belief that Bumi’s coal assets are among the best in the global coal industry in terms of volume potential and cost advantages. However, corporate governance issues have recently increased investor risk aversion for Bumi, which we believe will likely result in a 20-30% discount to peers.
Our dilemma
Although we, along with the Street, did not downgrade Bumi prior to the share price collapse in H208, we subsequently met with some criticism for maintaining our Buy rating. However, our view was that downgrading Bumi after it had lost 95% in value would be assuming bankruptcy, which we argued was an unlikely scenario given its high asset quality and strong operational outlook.
The Street’s dilemma
We reiterate our view that the Street applied what we believed were arbitrary corporate governance discounts to what we viewed as fundamentals that had once warranted a Buy rating. We believe the valuation should be based on conservative and critical assumptions about debt and overall profitability.
Valuation: downgrade to Neutral, raise PE-derived price target to Rp2,100
We downgrade our rating from Buy to Neutral following the 361% share price rally since 15 January 2009. We raise our 12-month PE target multiple 4% to 7.9x from 7.6x, which is 20% below the sector average, while we roll over our EPS estimate 25% to mid-2010 and raise it to Rp264. We raise our price target from Rp1,600 to Rp2,100.
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