Analyst Olie downgrades Bumi Resources (BUMI IJ) to Outperform (from BUY). We have revised down our earnings by 5% to 30% with higher ASP negated by higher tax and slightly lower contribution from NNT. Olie cuts the TP to Rp2800 (from Rp3800).
BUMI share price has underperformed peers by around 30% YTD. Olie thinks that it is important to see the following catalysts to actually materialize before the underperformance is reversed: (1) tax issue being settled, 2) strategic investors stepping in (3) de-leveraging progressing, and 4) permits for zinc and copper-gold projects that the company plans to float being secured.
We would need to see current political struggle involving key shareholders at Bumi and the government to be settled, as most, if not all, of catalysts mentioned are dependent upon blessing from the government.
BUMI might need to raise additional debt, probably around US$430m, to refinance loan and, potentially, acquire soon-to-be-divested stakes at NNT. Note that the company is unlikely to be able to use restricted cash and short-term investment.
We have been sceptical on BUMI ability to continue paying lower than stated, 45% tax rate (see our note dated back in Aug08). Since profit is booked at operating company level, with effective tax rate of 45% while debt is at Bumi resources as holding company with tax bracket of 25%, the effective tax rate at Bumi Resources should be higher than 45%.
We feel that a lot of negatives are factored in the share price and see more upside risk from current share price level. Having said that, there are just too many moving parts for this stock. Timing for positive catalysts to emerge, politically-related, would be hard to predict.
It would be far easier for investors who want to have exposure to coal names in Indonesia to simply focus on simpler names like Adaro (ADRO IJ) and Indo Tambang (ITMG IJ), both names are our top picks in this space.
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