Slashing target price by 20% but maintaining Buy/High Risk rating — Bumi’s share price has massively underperformed the market and its best performing local peer (49% and 52% YTD, respectively). A host of negative news flows continued to push valuations lower and share price rallies have been used by foreign investors as selling opportunities. We have cut our target price by 20% to Rp2,650 on earning forecasts cuts but maintain our Buy/High Risk rating on the stock’s depressed valuations.
Deleveraging efforts, if successful, could boost sentiment — Management’s plan to reduce its current huge debts of US$3.7b by US$700m this year, mainly via non pre-emptive share issuance and listing of its non coal assets, could be a substantial positive catalyst, even if only either one is realized. We think the rerating will be elusive until the company’s deleveraging efforts come to fruition and the group’s financial milieu improves considerably.
Other potential cash sources — Aside from the planned two corporate actions, Bumi has up to US$456m receivables from asset sales that could potentially be received by September/October 2010. However, it remains to be seen if the expected timing would be realized. It is worth noting that two of the sale agreements were signed in December 2009.
Firmer coal prices to be subdued by lower volume — As the impact of depressed JPY09 contract prices are expected to disappear in 2Q10, we expect substantial improvement in Bumi’s average selling price (ASP). This is reaffirmed by the company’s recent announcement that its ASP in 2Q10 improved to US$71.6/t from US$62.7/t in 1Q10. However, given lower sales volume in 2Q10 (15m tons vs 16m tons in 1Q10), we expect Bumi’s 2Q10 EBITDA to improve by just 13% QoQ to US$268m.
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