Mandiri Sekuritas BUMI: De-leveraging

Due to the limitation of its financials, we expect Bumi to restrain its expansive mode for the next 12 months. Having been battered by tax investigations, probe into its earlier KPC acquisition of possible corruption by certain regional governments, repairing damaged investors perception should be in their top ‘to-do’ lists. Uncertainty over its P&L profile post huge debt undertaking and less room for tax ‘reduction’ scheme, bring headwinds to ! the effor ts. We’re now relying on the expectations that news of initiatives to reduce leverage through debt to equity swap and divestment of its mineral division will reduce uncertainty while at the same time resolution to the tax issues will clear the bad aura. We’re downgrading our target price from Rp4,136/share to Rp3,900/share on lower earning estimates.

Removal of tax ‘reduction’ scheme. Our number one concern is what Bumi will do to the reduced ability to lower its tax through coal pricing mechanism which previously could be transfer to a lower tax regime (30% corporate tax) from its CCOW tax regime (45%). One alternative is that Bumi could put back loan for KPC, and Arutmin development which currently under holding-company level back to subsidiary level. However, higher royalty payment is in the cards, and it will be interesting to see the impact to its P&L. We doubt there will be an explanation from Bumi regarding this as this is a sensitive issue and therefore, we can only know it by the time they do the reporting.

Settlement of revised tax returns. Arutmin and KPC filed revised Annual Corporate Income Tax Returns for 2005 to 2007 fiscal years and in December 2009, Arutmin and KPC, through several installments, have fully paid the 2008 tax liability based upon the submitted Annual Corporate Income Tax Return. The revised Annual Tax Returns for fiscal years 2005 to 2007 required Arutmin and KPC to pay an additional corporate income tax. The additional payments were made related to preliminary tax examination by the Tax A! uthoritie s.. As a result, total amount of US$600mn has been paid. (2009 financial report point 44b). Bumi has revised the retained earnings account for FY08 from US$1,298mn to US$877mn (see Exhibit 3 behind).

Maintain Buy recommendation. Our DCF which are based on existing debt and cash flow from KPC, Arutmin using 30% tax rate is Rp3,025/share. Investment in Herald, Dewa, Pendopo, FBS, loan to Bukit Mutiara (Berau) and 75% of Multi Daerah Bersaing, holder of 24% Newmont Nusa Tenggara was US$1,768mn (or Rp856/share, Rp/US$=9,400). We have not included the value in other domestic assets such as Citra Palu Mineral, Gorontalo Mineral and foreign assets.