Bumi's FY09 net earnings came in at US$190m – well below consensus and our estimates of US$413m and US$359m, respectively. The company decided to take the full charge of its deferred stripping expenses amounting to US$275m.
Excluding one-off items, Bumi's net earnings would have been US$448m. On the top-line, Bumi's revenue of US$3.2b was just 2.2% below our estimate. However, due to the one-off charge, the company's operating income of US$638m was well below our estimate of U$1.1b. Excluding the deferred stripping expenses, operating income would have been US$913m.
Due to the US$275m charge, Bumi's effective tax rate surged from 26% in 9M09 to 45% in FY09, in-line with the Coal Contract of Work's requirement.
Investment strategy
We have a Buy/High Risk rating on Bumi. The share price has been hit by issues surrounding the Bakrie group's (BNBR had held 35% of Bumi) de-leveraging. However, the Bakrie group managed to settle its debts and the share prices of its affiliates have rebounded well off their lows. We believe the risk of share overhang has greatly diminished. As Indonesia's largest coal-miner, Bumi will continue to nbenefit from growing domestic and regional coal demand - Bumi is the largest exporter to the Asian region. The Asian coal theme has been and remains extremely potent, and has been the driver behind Bumi's share price performance over the past years. As such, Bumi's large exposure to the export market should mean that the company would see its earnings most leveraged to the price upcycle.
Valuation
Our target price for Bumi of Rp3,300 is set at 2.7x 2011E EV/EBITDA. This is based on a 55% discount to the valuation benchmark for Bumi's domestic peers (i.e. a 2011E EV/EBITDA of 6.0x, derived by applying a 15% discount to the 2011E EV/EBITDA average for global coal stocks). We have opted to use EV/EBITDA as our valuation metric to avoid distortions caused by differences in tax rates between Indonesian companies and their regional peers. We apply the 55% discount for Bumi to reflect the company's higher risk profile and high gearing. At our target price, Bumi would trade on 2010 P/E and 2011 P/E of 12.9x and 8.7x, respectively.
Risks
We rate Bumi Resources High Risk, rather than assign the Speculative flag suggested by our volatility-based quants risk rating system, as we believe the risks from the repo overhang and BNBR's financial predicament have largely diminished. Risks that could hamper the share price from reaching our target price include: 1) lower coal price and production realization; 2) further aggressive gearing up that could substantially raise Bumi's risk profile; and 3) corporate actions that could be perceived as detrimental to minority shareholders' interests.
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