JP Morgan - Bumi Resources ▲ Overweight Previous: Neutral

BUMI IJ CIC loan effects likely priced inOur PT implies about 50% upside; we upgrade to OW

• Upgrade to OW: Now that BUMI’s share price has fallen to below Rp2,400 (from Rp3,375 a month ago), we believe it is attractively priced. Our new PT of Rp3,500 suggests about 50% potential upside from the current price. Due to the 30% decline in the share price, we believe the unfavorable effect of the CIC loan is probably priced in. We therefore upgrade BUMI from Neutral to Overweight.

• We raise our PT from Rp3,200 to Rp3,500: We roll over our PT time horizon from Jun-10 to Dec-10, and increase our SOTP-based PT from Rp3,200 to Rp3,500, based on our higher DCF valuation for BUMI’s subsidiaries, given that the company’s efficiency program resulted in lower cost of production at the mine level. Our SOTP is derived by adding the DCF values of each subsidiary (a risk-free rate of 10.5%, an equityrisk premium of 5.5%, and a terminal growth rate of 5.5%) plus a 15% corporate governance discount to BUMI. The higher interest cost on the CIC loan (from 12% to 19%) only affects our FY10 and FY11 net income estimates, which we revise down by 39.9% and 37.3%, respectively, while FY12E net income is raised by 23.1% as BUMI refinances the loan.

• Investment drivers: We believe the following factors could drive BUMI’s share price to outperform: (1) tight supply in the global coal market could benefit coal price: increased demand from China, India and Indonesia; (2) long-term cost savings (we assume US$2.5/ton starting in FY11) from conveyer and power plant replacing truck hauling and diesel.

• Potential catalysts: (1) Further purchases by China in the international coal market in 1Q10. (2) Favorable corporate actions in 1H10, e.g. acquisition of Newmont Batu Hijau or BHP Billiton Kalimantan assets, (Bisnis Indonesia) or a joint-venture with CIC in FY10 (Bloomberg).

• Risks: BUMI has one of the highest betas in Indonesia—volatility is a key risk. The company also has a track record of corporate actions, which will likely continue. Event-based moves could pose both upside and downside risks to our view—if perceived to be negative, the stock could fall.