Morgan Stanley | BUMI Resources; Not the Same as Before

What's Changed Price Target Rp420 to Rp1,650

Impact on our views: Following changes to our regional coal pricing, we are raising our forecasts for Bumi. Meanwhile, we believe the BNBR-related concerns that have impacted Bumi’s share price the past 6-9months have eased significantly. Taking into account the changes to earnings and lower technical risk, we are removing the discount to its fair value and introducing Bumi’s end-2010 fair value at Rp1,650. Given downside risk to share price we are maintaining our Underweight rating.

Discount warranted: Bumi is currently trading at a significant discount to its peak valuations as well as vs. its Indonesian peers. Nevertheless, we believe the discount is warranted given the lack of clarity in corporate strategy following recent acquisitions. Where the focus had previously been to improve coal mining operations, Bumi has been acquiring underground coal reserves and mining contractors and non-coal assets. These acquisitions have also significantly increased the debt burden as Bumi enters a period of lower earnings.

Better alternatives: In the past, Bumi has been among the most aggressive in terms of optimizing sales to achieve higher ASPs. As such, it was a key beneficiary in a rising coal price environment and was re-rated accordingly. However, this theme is no longer unique to Bumi. Within the space, we see alternatives in:

ITMG (ITMG.JK, OW, Rp19,550) – Another play on the rising regional coal prices trends. In our view, a strong balance sheet also provides potential upside in
production volume through acquisitions. More importantly, its focus on shareholders should mean acquisitions are more likely to be value accretive.

PTBA (PTBA.JK, OW, Rp11,400) – In addition to positive pricing momentum, PTBA also has strong production visibility in our view. Where Indonesian coal mines have tended to disappoint on volume, we believe PTBA is on track to reach 20mt production by 2013.