JP Morgan - BUMI

Attended JPMorgan Indonesia conference last week. Key take-aways: (1) Management targets US$1bn debt reduction by year-end 2010. One plan would be to issue non pre-emptive shares to non existing shareholders, amounting to 10pct of outstanding shares. (2) Conducting limited audit review on 1Q10 results (suggesting that the deal may occur within the next three months). (3) CIC debt repayment will start with US$600mn in 2013. Perhaps US$600mn minimum offer for the 10% new shares (implied share price of around Rp2800) would be a good starting point?

CLSA Bumi, maintain Sell, BUT .... Salesdesk

Research Today:
Our analyst Olie has just written a report on Bumi Resources (BUMI IJ). Olie’s TP is Rp650 (up from Rp500 previously), but SELL recommendation is maintained. The TP is based on the blended valuation method, assigning 40% discount to conservative NPV.

Key points from the report:

(1) Olie revises his earnings forecast up (by 15% in 2009 and 75% in 2010)
Changes in debt and asset composition that resulted in lower than previously assumed interest expenses.
Inclusion of profit from the recently acquired assets, DEWA and FBS: will add around 5% to earnings in 09.
Debt repayment schedule: faster than what we expected earlier.

(2) Mounting debt and no immediate CFs for many assets that BUMI acquired
BUMI’s mounting debt is approaching US$1.7bn of Dec 08 and the big chunk of the debt proceeds is being used to finance non core assets (reaching US$782mn as of Dec 08). And these investments, except DEWA and FBS, are not going to generate any cash flows in the near future.

(3) Would BUMI pay Rp100/share dividend?
Market has also been talking about BUMI to pay Rp100 dividend/share (we will know in June EGM). This is based on the 30% dividend policy that BUMI stated as its max payout policy, or 30% * US$645mn (FY08 net profit) = US$194mn. BUMI’s cash available, depending whether to include restricted cash or not, would range between US$31mn to US$233mn. There seems to be capacity to pay Rp100 div/share. Bottom line: not impossible but may prove to be complicated.

Sales desk’s comment:
While we agree with most of Olie’s more fundamental view, from trading perspective BUMI is looking very interesting.

(1) BUMI is still by far the most liquid stock in the sector, in fact the most liquid stock in Indo market. It is 4x more liquid than the next most liquid stock in the coal space (PTBA).

(2) Investors have massively reduced their positions in BUMI. And only 1/3 of the analysts who cover BUMI currently have BUY rating for the counter.

(3) BUMI is the most leverage coal play (to coal prices) in Indonesia. BUMI earnings sensitivity is around 2% for 2009 and 5% for 2010, this is for 1% change in contract thermal coal price (vs. less than 1% in 09 and less than 4% in 2010 for other coal companies). Thermal coal futures in Europe has been rising lately and the speculation is that the gap with Newcastle benchmark is going to narrow going forward (to be fair, Olie already assumes US$72 benchmark coal price, which is above current Newcastle spot price, but hard to fight the sentiment).

(4) It appears that most analysts have assigned a zero valuation to most of BUMI’s non core assets, such as Herald Resources. We think improved sentiment in the commodity sector will change this over time.

(5) Our China Reality Research pointed out that coal port inventory -17% WoW to 3.8mn tonnes. Spot prices of higher-quality coal (5,800kcal/kg and 5,500kcal/kg) rose for the second week, up 1.2% and 1.8% WoW, respectively. Meanwhile, inferior coal (5,000kcal/kg) rose by 2.1% WoW.