UBS Bumi Resources (BUMI Buy PT 3,200): Buy as the chickens come home to roost…

Sales Focus: Bumi Resources

Two years ago, BUMI was hit with an unfortunate double whammy:
1 July 2008: Bapepam announced new margin trading requirements that required private investors using margin to meet minimum wealth and income restrictions and to restrict margin to 50% of the value of transactions.

2 July 2008: Benchmark coal prices decline overnight by $20 per tonne.

The BUMI stock price immediately began a long and painful collapse, losing 96% of its value (peak to trough) against a backdrop of repo agreements, margin calls, political strong-arming and enforced stock market closure.

The Bakrie group was left with the job of picking up the pieces. Simply put, the actions they took in late 2008 were sufficient to buy two years, and their chickens are coming home to roost right around now.

In summary, BUMI has USD 965 m of debt maturing in the nine months following March 2010. CB puts, amounting to USD 129 m and USD 302 m respectively and maturing in October and November 2010, are the most critical. August and September are also key months, as it is important for BUMI to show some traction on assets sales (and indeed, turning receivables related to past asset sales into cash) and the long-touted non-preemptive rights issue.

The newsflow on BUMI has been relentlessly negative in recent months
The list of negatives is long: Tax investigations, fraud investigations, funds missing from the bank accounts of other group companies, the IPO of the non-coal assets blocked by Bapepam, rumours of weather-related production shortfalls, continuous delays to asset sales and confirmation that CIC is unlikely to participate in the long-touted non-preemptive rights issue.

There are fresh rumours (perhaps contributing to Monday’s sharp fall) that BUMI will be downgraded in the upcoming August MSCI reweighting. This didn’t happen overnight, but might happen in the next review in 3 months.

Moreover, the fact that shipments are going through this week at a Newcastle price of $85/tonne (down from $100+ a few short weeks ago) means that it’s squeaky bum time for the number crunchers at BUMI.

However, there are some glimmers of hope
BUMI has repaid some of its banks early in recent weeks and the group has succeeded in raising funds at Berau ($850 mn bond issue) and Bakrie Telecom ($300 m in vendor financing). In short, whenever cash is needed, it is duly produced.

Another positive sign is that a buyer acting through local broking house Sinarmas Sekuritas has bought BUMI to the tune of approx. $200 million in the past three months. While various hypotheses exist as to who might be the buyer through Sinarmas Sekuritas (the Sinarmas group, Noble/Glencore, the Chinese), the identity remains a mystery and could provide surprise upside for the stock. Our instinct is that it is not the Bakries buying.

It’s also worth bearing in mind that there is potential for the company’s debts to be settled on a non-cash basis. In Asia, the culture allows for a greater degree of flexibility than in other markets.

The bottom line is that our credit analyst Selina Yu is of the view that the group will make it through the current cash crunch.

Should we be buying in BUMI’s darkest hour?
The short answer is no, not yet, but possibly soon. Our read is that the chickens are at the door of the henhouse, but not yet perched on the roost.

The chart looks very ugly and a new low was reached at close of trading today, raising concerns that there may be further margin calls. Our advice is to keep your ammunition dry and await a better opportunity.

Disclaimer: BUMI has a reputation for being a ‘leaky’ company from an operations and corporate governance perspective. For many of you, this company won’t tick the right boxes.

DBS Bumi Resources (BUMI Buy PT 3,700): Opportunities, risks and Delta Dunia

Analyst Andreas Bokkenheuser sees attractive risk-return profile in Bumi, following recent share price underperformance.

While the risks are widely acknowledged – high financial risk, tax investigation overhang and EPS dilution, the positives should not be completely ignored. In addition to the positive trend in coal price, Bumi owns a number of Indonesia’s most valuable mining assets.

Andreas projects Bumi to generate an annual EBITDA of US$1-1.15bn in 2010-12, in addition to the potential to raise US$1bn in fresh capital through the IPO of its non-coal assets.

Meanwhile, given Bumi’s partial ownership in Delta Dunia Makur (DOID), Andreas does not rule out the possibility for the former to acquire the latter. Bumi TP of Rp 3,700 implies 30% governance discount + 10% potential rights issue dilution and 12x forward PE. Risk to our TP would be the potential back-tax payments and penalties.

Sales comment: BUMI feels like yesterday’s story. We think that the risk/reward profile is better at Delta Dunia (DOID).