Macquarie: Roadmap to attractive entry point BUMI (TP Rp2,350)

Event
􀂃 We recognise that Bumi is not an investment grade company but we have attempted to lay out a roadmap which could lead to an attractive entry point. This includes 1) short-term share-price capitulation and energy price weakness, 2)consensus downgrades; and 3) clarity around Bumi's acquisition strategy.

Impact
􀂃 Capitulation and energy price weakness. The view from investors we have spoken to recently is one of frustration given the CIC deal, potential further bond issues and concerns over acquisitions. We see the potential for further capitulation in the short term, particularly if energy markets including coal markets soften, with Rp2,000/sh being a reasonable entry point.

􀂃 Consensus downgrades in 2010. We believe consensus expectations of US$80-90/t for coal prices are still too high for 2010 versus our US70/t forecast. While we acknowledge that coal prices could be in the US$70–75/t range, we do not think it is likely to be as high as US$80/t range. Our sensitivity analysis in Bumi produces the following results for 2010 net profit.

􀂃 At 70/t price, it trades on 27x PER with US$171m net profit.

􀂃 At 75/t price, it trades on 18x PER with US$250m net profit.

􀂃 At 80/t price, it trades on 14x PER with US$329m net profit.

􀂃 At 85/t price, it trades on 12x PER with US$390m net profit

􀂃 Surprisingly, our sensitivity analysis above highlights that consensus (which is forecasting a US$350m profit in 2010) has an implied coal price in the US$80–85/t range. We note that on our 2011–12 view we see the potential for coal prices to trade in the US$80–90/t range as Indonesian and Indian demand accelerates.

􀂃 Acquisition strategy clarity. Following the CIC deal at 19% interest, investors are increasingly concerned about Bumi's acquisition strategy. We require clarity as to whether potential growth projects such as Maruwai (not listed), Newmont’s Batu Hijau, Berau (not listed) will be completed at the Bumi level or at another Bakrie level. We note that Bumi has US$200–250m worth of investments with ReCapital (a Bakrie-related broker). We also note recent press articles highlight that ReCapital (not listed) appears set to win the Berau sale process. Joining two dots together, we require clarity as to whether ReCapital/Bakrie will be using Bumi's balance sheet to fund the Berau acquisition.

Earnings and target price revision
􀂃 No change Price catalyst

􀂃 12-month price target: Rp2,350.00 based on a DCF methodology.

􀂃 Catalyst: Consensus downgrade

Action and recommendation
􀂃 We reiterate our Underperform recommendation and Rp2,350 price target. Should we see further share price weakness, consensus downgrades and clarity around Bumi's acquisition strategy, we see the potential to turn more positive on the stock.