Danareksa Delta Dunia Makmur (DOID IJ, Rp 980 BUY) Learning a hard lesson

Maintain BUY, TP stays at Rp2,350
We maintain our BUY recommendation on DOID. Our optimism centers on the fact that the contribution from its mining contracting business will be fully reflected in the full-year earnings starting this year. On the basis of this, we estimate excellent net profits growth of 28% 5-year CAGR in 2010. For 2010F, we forecast 18% growth in revenues, supported by a higher volume of work and higher average contract prices compared to last year. Although the cost of revenues will rise due to higher depreciation, the gross margin still improves thanks to the increasing revenues. There will, however, be higher interest expenses and higher forex losses arising from the additional USD110mn of debts this year. This trims our 2010F net profits forecast to Rp846bn from our previous forecast of Rp1,083bn. Our blended-valuation based TP remains at Rp2,350 (implying PE and EV/EBITDA 10F/11F of 18.7x/10.3x and 7.1x/5.1x, respectively), however. With the lower-than-expected operating expenses in 2009, we revise our estimates for operating expenses in the following years. This gives a boost to our net profit forecasts. With the net profits growing at a very brisk 3-year CAGR of 63% in 2009-2012 (compared to UNTR’s 12% net profit growth of 3-year CAGR in 2009-2012), we feel the high implied PE 10F is justified.

Regaining credibility may take some time
This week DOID announced that it had agreed with Recapital Investment Group to halt discussions on acquiring a 51% stake in Berau, explaining that commercial terms could not be agreed upon. Consequently, the company’s planned rights issue is off. The announcement raises questions over DOID’s credibility since rumors of a rights issue spread in mid-March 2010 (the official announcement of rights issue was finally made on 30 March), causing DOID’s share price to slump 30% from Rp1,400 on 17 March to Rp980 on 20 May. Yes, DOID does have solid fundamentals, but we still believe it will take time before investors regain confidence in the company. Most of all, investors will want to see DOID “deliver” good results going forward and avoid any other such confidence sapping deals while still focusing on its key organic strengths.

The valuation remains attractive
Our TP of Rp2,350 is unchanged. It is derived from a blended valuation of DCF and relative valuation methods, considering that while the 2010F net profits are 22% lower than our previous forecast, the net profits in the coming years are estimated to be higher due to lower operating expenses. As for the valuation, DOID’s shares now trade at EV/EBITDA 10F/11F of 4.1x/3.0x, or much more attractive than UNTR’s shares which trade at EV/EBITDA 10F/11F of 6.1x/5.0x. BUY maintained.