Mandiri Sekuritas BUMI: Taunting the doubters

Taunting the doubters

With 19% IRR on US$1.9bn debt, the impacts on Bumi’s bottom-line is very easy to understand as the loan replaced was just US$1.7bn with an average interest of 8% (1H09 annualized). However the reason behind the deal was not as clear as the detrimental financial impact above. This is where the optimists and pessimists draw the line. We kept our BUMI target of Rp4,000/share even though our DCF resulted in Rp2,900 target price (TP), as this TP assumed no acquisitions and no expansion, something that we expect to be realized in the near future.

Detrimental impact in the initial years. The US$1.9bn deal has IRR 19% plain and simple, accrual, and no prepayment below 2 years. The impacts?: 11% and 52% decline in FY09F and FY10F earnings, respectively from our previous estimates. The other impact is our WACC increase from 9.3% to 10.1%, reducing our DCF valuation to Rp 2,892, other assumptio! ns remain the same.

Why do they do the things they did? (1) To fulfill urgent liquidity requirement from the Bakrie Group; or (2) previous lender gave up. Reason 1 was the most reasonable, while reason 2 although probable but unlikely. But if reason 1 is true, why the amount is humongous, while market rumors on Bakrie liquidity requirement was only around Rp6-8tn (US$0.6-0.8bn).

I am on the optimistic side, but it really is a bet. Why : (1) I am a believer of dollar de-basement, (2) rising commodity price in US$ terms, (3) we do not think the main aim of the deal is to obtain fund to prepay the Bakrie Group’s debt because it is not its custom to make early debt retirement, and (4) there must be some urgent attractive acquisitions ahead. The downside: one or some of the above did not turn out to be correct.

Maintain Rp4,000/share target price. In our DCF calculation, volume sales from Bumi peaked at 79mn tons in 2013 29% less than what Bumi is expecting by 2012, and benchmark price of coal of US$75/ton. We added back US$300mn short term investment in Recapital on improving outlook of its recovery, and excluded all other assets.