We upgrade our rating for Bumi Resources from Neutral to Buy following our revised coal price estimates for 2010-13. Our price target is raised from Rp2,100 to Rp3,400 as we increase our 2010 target PE from 7.9x to 10.7x following a lower risk-free rate from 12.8% to 11.5% and a higher 2010 EPS estimate. We make the following adjustments to our earnings estimate for Bumi Resources.
Coal price assumption revision. Our revised thermal coal price assumptions accounts for around 95% of the total net earnings revision.
Cost assumption revision. We revise our cash cost assumption as the company is increasingly able to utilise its high asset quality and close proximity to port. To this end, Bumi Resources is guiding for a 20% reduction in near-term costs, which is the highest reduction in the Indonesian coal sector this year. The revision accounts for around 5% of total net earnings changes.
Tax rate assumption revision. We upgrade our post-2010 corporate tax rate assumption to 30% from less than 10% previously. Management is guiding for an expiry of deferred tax losses from the company’s previous oil and gas operations.
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