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Monday, June 20, 2011

Earnings in line; volumes come up short - Bumi Resources

UBS Securities

Bumi Resources reported first quarter revenues and net profit of US$1.23bn and US$113m, which was an increase of 21% and 16% YoY respectively, according to Reuters. This was roughly in line with our and consensus’ full year net profit estimates at 20% and 22% respectively. The share price was down 3% on the day, which we attribute to lower than expected volumes of 14mt, only 21% of management’s full year guidance.

Q2 pricing should improve; volumes to remain under pressure

We expect Bumi’s second quarter realised pricing to improve as 2010 Japanese benchmark contracts expire (US$98/t) and 2011 contracts take affect (US$130/t). However, seeing Bumi is 12-18 months away from completing its conveyor belt expansion, we expect production volumes to remain under pressure into Q2. Our 63mt full year estimate is 6% below management’s 67mt target.

Volume execution is key to valuation

In our 18 May 2011 report, Bumi Resources; What’s the Upside, we concluded that volume execution is key to Bumi’s potential re-rating following the Vallar deal. More specifically, our scenario analysis concluded that a near-term execution on volumes could add almost 20% to our valuation, while the potential upcoming refinancing with CIC ‘only’ adds 8%. We maintain our Sell rating despite the stock’s recent 15% correction.

Valuation

Our price target is based on a 12.1x target PE and a 14.8% cost-of-equity.

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