Tuesday, July 12, 2011

Bumi Resources - 16% Upside

by UBS Securities

We revise Bumi’s earnings from -48% to 214% for 2011-13E, and upgrade our rating from Sell to Buy following the stock’s 17% correction from its May peak this year. It is a large revision that incorporates a change from Indonesian GAAP accounting to IFRS in line with the parent company’s listing in London as well as a significant upgrade of 2013E production. Our price target is based on a 12-month PE multiple of 12.9x.

Average selling price increase. We revise our ASP assumption from -6% to 9% in 2011-13 in line with our higher benchmark price forecast. Bumi has priced 66% of its 2011 volume YTD, while the remainder is based on unpriced index-linked contracts and spot sales.

Volume adjustment. We make a small adjustment to Bumi’s production in 2011-12E, which we attribute to insufficient investment in the mines, conveyor belt construction time and general infrastructure bottlenecks. The company produced 14mt in Q11 (23% of our new estimate), while we believe Q2 production will be similar. Our new production estimate is down 2% to 61.8mt in 2011, and up 3% to 67.8mt in 2012. We make a significant 15% increase to our 2013 volume target in anticipation of final completion of new conveyor belt capacity.

Sale of BRM. Bumi sold its non-coal assets, Bumi Resource Minerals (BRM), to London-listed Bumi Plc in Q211 for US$2.07bn. We make upward adjustment to cash reserves and earnings accordingly.

Deleveraging. Following the sale of BRM, we expect Bumi to pay down tranche 1 of its high-cost 12-19% US$1.9bn debt with CIC. The early US$600m prepayment entails an additional US$30m penalty for early prepayment. We take note that Bumi is once more able to borrow at around 6-8%, which is in line with the sector. We expect the remaining US$1.3bn to be repaid in 2012, ahead of schedule.

IFRS accounting. As Indonesian GAAP financial reporting standards move closer towards IFRS, we take note that Bumi no longer amortises goodwill. We have removed goodwill amortization from our earnings estimates and expect Adaro to make a one-off large non-cash write-down in the future.

We base our price target on a 12-month target PE valuation of 12.9x, which incorporates a 7.6% risk-free rate, 1.3x beta and 14.1% cost of equity. Our previous 12.1x target PE was based on a 7.6% risk free rate, 1.4x beta and 14.8% cost of equity. Bumi Resources is currently trading in the mid-range of its historical PE and EV/EBITDA band.

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