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Monday, July 4, 2011

Delta Dunia Makmur - High Quality Business at Attractive Valuation

by Samuel Securities

Professional business. DOID and its subsidiary Bukit Makmur (BUMA) was managed by professional management with good and long experience in mining business. After TPG Capital (TGP), Government of Singapore Investment Corporation (GIC), China Investment Corporation (CIC) entered Northstar Tambang Persada (NTP); we believe company will better in good corporate governance.

Revenue on the way to normal. Historically (2001-2010), the production of coal grew by CAGR of 21.9%, higher than Indonesia coal production at CAGR 16.8%. Meanwhile overburden grew by CAGR 22.5%. In 2009 and 2010 was a challenging year for BUMA where bad weather conditions made the production of coal and overburden disturbed. We expect production will improve as La Lina phenomenon will end.

Financial leverage brighter. By using refinancing steps, BUMA has succeeded reducing cost of debt as much as 425-450 bps or with cost of debt 4.00%-4.25% in this current year. This refinancing can save interest expense around US$19 mn even the total of loan enhanced US$200 mn to be US$800 mn. We view net gearing will drop to be 3.1x and debt to equity will be 4.0 this year from previous year 43.7x and 47.8x.

Attractive valuation, TP Rp1,450/share. We expect free cash flow will be positive in the next years because 1) the dividend payout ratio is 0% until the debt repaid, 2) increase in production and overburden 3) the savings of refinancing as lower interest rate, and 4) reduction in extraordinary expenses. We obtain target price of Rp1,450 reflecting PE'11 20x. Key investment risks: mining operations are concentrated in Kalimantan, coal prices fluctuations, regulatory changes, foreign exchange fluctuation, and dependent on certain key customers. Initial coverage with BUY recommendation.

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