TP reduced to Rp3,450 but still a BUY
We maintain our Buy recommendation on BUMI. The outlook looks bright and we forecast revenues to grow a brisk 25% in 2010 due to better selling prices and higher sales volumes as coal demand strengthens further. Better coal pricing – as seen in BUMI’s ability to secure a benchmark selling price of USD104/t for its coal sales to a Japanese customer – may raise the 10F ASP to USD68/t from our previous assumption of USD60/t since the price will serve as a benchmark for BUMI’s other deals. However, much of the positive is offset by higher expected production costs and a higher tax rate assumption of 45%. As a result, we arrive at a lower TP of Rp3,450 (Rp3,650 previously). Our new TP implies a PE 10F/11F of 20.6x/21.9x, or slightly less than the historical 2-year rolling PE of 22.7x.
Resolution of tax issues will take some time
BUMI believes that its tax issues can be resolved within the next three months. We doubt this, however. In general, the rule is that tax underpayments are penalized at 2% interest per month on the amount of tax underpaid, calculated from the time of the submission of the earlier Annual Tax Returns to the time of the payment of the additional tax expense. In this case, since BUMI recognizes it has underpaid USD600mn of tax in the fiscal periods of 2005-2007, we calculate that BUMI might have to pay a USD430mn interest penalty (i.e. an average of 72% interest). By comparison, BUMI has so far only recognized a USD42mn interest penalty for the late payment of the 2008 income tax. Hence, if the interest penalty were to be paid in 2010, it could push down BUMI’s 2010 net profits by 71% to USD95mn and its NAV to only Rp2,500/share. It is also important to realize that the Tax Directorate may have a differing opinion in regard to the amount of tax BUMI underpaid. And with the spotlight on the Tax Directorate because of the Gayus Tambunan “tax mafia” case, it may take longer for BUMI’s tax case to be resolved.
In need of external financing
USD575mn of BUMI’s debts will mature in 2010. We believe that BUMI will need to raise funds from external sources in addition to using its own money to repay these debts. After making a USD600mn payment to recognize its tax underpayment, BUMI’s cash at the end of 2009 was only USD60mn. Thus, in our estimates, BUMI will need at least USD1bn of external financing to both service its debts due in 2010 and to finance its capex (estimated at USD395mn). Besides getting loans other options may include: (1) selling assets such as Bumi Resources Mineral (BRM). In this regard, BUMI has already indicated that it may sell a 28-30% stake in BRM. Based on BRM’s asset value of USD1.9bn, a 28-30% stake could possibly sell for USD570mn; (2) issuing 10% non-preemptive shares - although this option is subject to the resolution of BUMI’s tax issue; (3) conduct a rights issue (subject to meeting certain financial ratios such as a debt/EBITDA ratio of not more than 4x – which may be possible for BUMI to achieve this year).
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