These Flashnotes have been approved for external distribution to clients only. Stock: DOID IJ
Name: Delta Dunia
Price: Rp1,190
Market Cap (bn): Rp8,081
Market Cap (m): US$885
Current valuation (DCF): Rp1,740
12mth price target: Rp1,950
Recommendation: Outperform
Event A change in major customer ownership post IPO. At the time of DOID's placement in early November 2009, its largest customer Berau was going through a sale process (which included potential bidders such as Banpu, NTPC and Recapital, etc).
Approximately two months post the IPO, Recapital (Bakrie-related broker) announced that it won the Berau bid to acquire a 90% stake for US$1.48bn, of which US$900m was paid upfront with a deferred settlement of US$580m. Increased risks of paying premium valuations for Berau. DOID announced this morning that it is in early-stage negotiations with Recapital to purchase Berau. We highlight the increased risks that DOID could take a stake in Berau at a premium given the risk of limited growth opportunities at Berau, KPC and Arutmin (including DEWA). We estimate that Bakrie's related contracts will represent about 40-45% of the company's revenue going forward. Impact A change in industry structure.... leads to a change in plan.
Historically!, DOID's wholly owned subsidiary Buma has been able to grow strongly via non-Bakrie coal exposure (ie, Bumi). However, with the Recapital/Berau deal, Bakrie-related entities would likely generate long-term production of roughly 130mt (and represent 40% of the industry). Under this revised industry structure, Buma would have very little option but to align itself with the Bakrie-related mines. Refer to our prior note "Potential for a capital raising" for a background on Berau Who owns Berau? Recapital acquired 90% of Berau Coal from the Risjad family back in late 2009 for about US$1.48bn . The remaining 10% is owned by Sojitz Corporation (2678 JP, ¥172, NR). The transaction was funded via a structure where 1) US$600m was funded via CS facility, 2) US$300m was funded by Bumi via a loan, and 3) US$580m via vendor notes.
Further, we highlight the potential for Recapital's need to raise about US$880m as we understand that Bumi's US$300m loan needs to be repaid this year and US$!580m vendor notes need to be repaid to the Risjad family.
Scenario 4 is looking more likely. We highlighted four scenarios in our prior note , Potential for a capital raising, where 1) Recapital comes up with the cash - no impact on DOID; 2) Recapital gets cash from Bumi - no impact on DOID; 3) Recapital sells asset to DOID at a discount - potentially attractive for DOID ; and 4) DOID purchases Berau at a premium valuation.
However, we see an increasing risk of DOID taking a stake in Berau at a premium price given the threat of contract cancellation/no contract extension at Berau (which expires in 2014), and also not winning any new contracts at KPC and Arutmin. We forecast the three mines combined would represent about 40-45% of the company's revenue going forward. But negotiations shouldn't be one sided....
We think DOID/Northstar still have a relatively strong negotiating position here as 1) Buma currently represents about 75% of Berau's coal production; and 2) The transaction needs minority suppport to fund the deal (or alternatively the underwriters are going to be left with a large position). Further, we also highlight that the potential reason for the deal is for the company to pave the way for a future relationship with the Bakrie family, especially given the family via its coal mines (KPC, Arutmin and Berau) contributes about 35-40 % of Indonesian coal production. We also note that Theiss and Pama have acted as contractors to Bumi on a long-term basis in a cordial manner. Acquisition price depends on L-T coal price. We highlight that the potential acquisition could range at US$1.2-2.1bn based on a L-T coal price assumption of US$70-95/t. We currently forecast L-T coal price to be US$75/t, which is at the top end of the global cost curve. However, we flag the potential upside risks to the cost curve towards US$90-95/t driven by increasing Chinese cost curve as a result of new resources tax, increasing operating costs and Rmb appreciation. Scarce details around the deal. We acknowledge that the potential ! deal is still in preliminary stage and therefore lack details.
However, we highlight the risk of the company overpaying for the Berau acquisition. We understand that as part of the potential transaction, Berau is also likely list via an IPO. We therefore highlight the risk that DOID's acquisiton price may not be in line with the IPO market price, which could lead to a loss of investment. However, should DOID purchase a stake at the same price level as the IPO price, we see this as being potentially value accretive.
Experience from other Bakrie scenarios is telling..... It is difficult for us to forget the Bumi/Bakrie experience where despite being able to justify "asset valuations" of Rp2,000-3,000/sh, investors sold first and asked questions later, leading to the share price collapsing to Rp500 before it rebounded back to currently levels of Rp2,400. One difference in the Berau case vs history is that the Berau deal needs minority equity support, whereas historically Bakrie were able to do related-party transactions via gearing up the balance sheet with debt (and therefore no equity raisings).
Action and recommendation The Berau acquisition process is still in its preliminary stage , and whilst we think that negotiations shouldn't be one sided, we see increasing risks and may have to review our investment opinion. Companies mentioned Banpu (BANPU TB, Bt 592, OP, TP:Bt730) NTPC (NATP IN, INR201.4, OP, TP:Bt258) (BUMI IJ, Rp2,325, Outperform, TP: Rp3,075) Recapital (not listed) Berau (not listed) Darmahenwa (DEWA IJ, Rp108, NR)
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