UOB Kay Hian - BUMI NDR Feedback

Bumi Resources (BUMI IJ) BUY
Price/Tgt: Rp1,860/ Under Review Mkt Cap: US$3,535.8m Daily: Vol 342.2m (US$62m) 1-Yr Hi/Lo: Rp8,450/385


We brought BUMI for NDR to KL last week meeting. Most investors agree that BUMI is attractively priced but there are still lingering concerns on the group's corporate governance. Our view is that as BUMI trades at close to 20% discount to its peers in terms of PER, the corporate governance risks are thus priced in.
We highlight catalysts in the near future:

Increasing production in 2Q. BUMI sold only 11.5m tones of coal in 1Q. But the management indicated that in May-June, it is running at monthly output of 5mt. Extrapolating this, we expect BUMI's 2Q production to reach 14mt, up 21% QoQ. We think BUMI should be able to achieve sales volume of 56-58mt in 2009E, up 8-12% yoy.

JORR certification of FBS points to reserve of 174mt, result out within one month. One of the main criticism of Fajar Bumi Sakti's acquisition was that the deal was very expensive at Rp3.2tr based on 14.5mt reserves (1.5mt open pit and 13mt underground) implying EV of US$21/t. The stock exchange authority has asked BUMI to reduce its acquisition cost by 14% implying EV of US$18/t. BUMI's own estimate is that FBS reserve should amount to 98m tones, higher than the Indonesian Coal Book's 2008/2009 data of 14.5mt. The management indicated that it is having JORR to certify FBS reserve which estimate should come up within a month and that the reserve should be even higher at 174mt. Should this turn out to be true, this implies acquisition cost of EV US$1.5/t, cheaper than the recent acquisitions of US$5-7/t, and also much lower than analysts' previous estimate of US$18/t based on Indonesian Coalbook of 14.5mt.

Chinese investor taking a stake in exchange for off-take agreements. BUMI indicated that it is selling for the first time 8-9mt of coal to China this year. Management does not rule out that talks are ongoing for off-take agreements with Chinese buyer and to show goodwill, the buyer may take up a small stake in BUMI (maybe up to 5% stake). There are market talks that the Bakrie family to place out a 10% stake to the Chinese strategic investor. We are convinced that there are talks with the Chinese buyer but the risk is that the negotiation could be dragged out.

Unlocking values of Herald but still preliminary. Management acknowledged that there are talks to sell a stake of Herald Resources to a Chinese investor as part of the move to raise funding to fund the exploration costs but the talks are still very preliminary. The forestry permit approval should be issued post Presidential election which should allow analysts to start factoring in Herald value.

General Update:
EBITDA of US$1.0-1.1bn in 09E. Management is guiding for ASP of US$62 in 09E versus US$73 in 08. With 1Q09 ASP of US$75/t, this implies average ASP of US$57-58 in 2Q-4Q09. But with costs coming down to US$33, it should be able to achieve US$1.0-1.1bn EBITDA in 09E slightly lower than consensus projection of US$1.2bn.

Lower dividend and lower acquisition cost should help balance sheet. BUMI's management has opted to be prudent with only 15% dividend payout in 2007 versus normal payout of 30%. Additionally, it will be buying 50% of FBS as compared to previously 76%; this coupled with the lower price tag thus reducing BUMI's acquisition cost by US$108m. The management explained, that the recent AGM whereby shareholders approval sought to pledge its two coal mines KPC and Arutmin as well as its stake in Herald Resources, are merely creditors asking for increased collateral. The management is looking to keep its debts at 1.0x EBITDA. The capex planned of US$700m are for 3-year period for conveyor belts and ports expansion. Additional capex of US$700-800m will be vendor financed for sourcing of heavy equipment.

Could sell forward at US$86/t in 2H10. The management said that there are buyers who would pay US$86/t for deliveries in 2H10 but it only sold forward a very small amount of 0.3mt. BUMI expects coal price to firm towards US$100/t by end-2010 from currently US$70.

But typical Bakrie group still eyeing for other assets. While the management indicated that it is looking to keep debts at 1.0x EBITDA, it is however eyeing for other assets including diamond mine in Libya, and coking coal concession owned by BHP. While the BHP coking coal concession is attractive given that it is a very sizeable concession (but the infrastructure costs are likely to be expensive given it is far from the port), we do not think that BUMI's balance sheet allows it to invest in so many assets at the same time.