Event
Delta Dunia released its March 2010 operational forecast, which highlights an improvement over the first two months, but coal production is still slightly below our expectation. The company produced 2.6mt of coal and 23m bcm of overburden. The 1Q operational numbers represent about 19% of our FY10 forecast for both coal production and overburden. We expect operation to continue to improve during the dry season in Q2-Q3. Further, we also see an increasing risks to our recommendation on the company as we see the uncertainty on the potential Berau acquisition to be an overhang on the stock. We therefore prefer UNTR as a more transparent way to play coal contracting industry.
Impact
Some operational improvement in March. The company produced about 2.6mt of coal and 23m bcm of overburden in March, which increase by roughly 17% MoM (for coal and overburden combined). This is largely driven by 10% more operating days during March as well as some operational capacity improvements. We expect operation to continue to improve during the dry season in Q2-Q3. Further, whilst we see downside risks to our 2010 production forecast of 40mt towards 38mt, we think that this could be offset by higher strip ratio (as strip ratio has started to increase in March from 7.8x in Feb to 8.9x) and therefore think that our 2010 earnings forecast for Buma of US$90m remain intact. Uncertainties causing overhang. We also highlight that uncertainties over the potential Berau acquisition could be an overhang on the stock, such as We see an increasing risk of Recapital having a substantial ownership in Delta Dunia (20-50%). Should Northstar and minorities give up their portion to the!
rights issue, we see a risk that Recapital owns between 20-50% of Delta Dunia. Should this happen, this could lead into Recapital having to do a general offer to Delta Dunia's minority shareholders? We see the risks of management reshuffle post the transaction at Delta Dunia level. We see the risks of Delta Dunia refinancing or renegotiating its outstanding bank loan and bond facilities totalling to US$600m. This is as the dilution of Northstar's ownership in Delta Dunia to below 40% will trigger "change of ownership clause", which allows the bond and loan holders to call the facility. Whilst we see declining risks of Delta overpaying for the acquisition, there are uncertainties on the final ownership structure of Berau (not listed). Potentially high capex requirement for Berau. Our channel checks suggest that Berau's previous owner has been under-investing in the past. Therefore, we see increasing risks that Delta Dunia might be required to spend significant capex to get !
Berau's production up from currently 14-15mt to its long-term target o
f 30mt. Discounted valuation...but for a reason? We acknowledge that the stock's current valuation appears relatively cheap as it trades on 9.3x and 8.4x PER 2010-11, which is a discount to Pama's implied valuation of 16x and 15x PER (2010-11). However, we highlight the risks of the valuation discount to remain given the potential of Recapital (not listed - Bakrie related investment house) emerging as a controlling shareholder of Delta Dunia.
Action and recommendation
We therefore see increasing risks to our recommendation on the company and prefer UNTR (UNTR IJ, Rp18,800, OP, TP:Rp20,500) as a more transparent way to play coal contracting industry or Banpu (BANPU TB, Bt628, OP, TP:Bt730), SAR (SAR SP, S$2.21, OP, TP:S$3.4), and PTBA (PTBA IJ, Rp17,450, OP, TP:Rp21,300) to play the coal producers.
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