We came away from a meeting with the company less concerned over the impact of Bumi’s planned 75% stake divestment in Bumi Resources Mineral (BRM).
The planned issuance of US$2.1bn convertible bonds by Vallar to pay for the acquisition of BRM undoubtedly creates a substantial overhang on Bumi’s share price over the next few months. The main uncertainties would be the pricing of the CBs once it’s listed some time in 3Q11. There are also substantial concerns over earnings dilution. However, we opine that the merits of the transaction, albeit via non-cash payment, outweigh the demerits.
First and foremost, the divestment paves way for the realization of Bumi’s major deleveraging efforts. If Bumi can execute the deleveraging plan in a timely manner, we think the stock’s valuations could substantially re-rate given market’s lingering concerns over the company’s high leverage and expensive CIC debts.
The annual interest savings from the first batch of planned prepayments of US$600m debt from CIC two years early in October 2011 would amount to US$114m (excluding the US$30m penalty). The savings alone should more than offset the deconsolidation of Bumi’s attributable annual earnings from BRMS of c. US$65m. Bumi will also receive annual coupons of US$41m from the convertible bonds. Moreover, Bumi is likely to book a substantial one-off gain from the divestment as the 87% stake in BRMS is carried at US$1.5bn on Bumi’s book. Finally, the deconsolidation of BRM would reduce Bumi’s net debt by c. US$180m from US$4.6bn at the end of 2010.
We maintain our Hold rating on the stock with target price of Rp4,200, which is based on 2012E EV/EBITDA of 4.8x – a 40% discount to Adaro’s target multiple.