Danareksa Sekuritas Delta Dunia Makmur (DOID IJ, Rp1,560 BUY) More breathing space

New TP of Rp1,720, maintain BUY
We incorporate the latest refinancing activities into our projection, slashing our FY11-12F interest expenses by 48.4-52.4%from our previous forecast. We also lower our Buma coal production and overburden removal estimates for FY11-12F, which reflects more realistic target, using the projected coal sector production growth as our guidance. Even though our FY11F EPS target is slashed by 47.7%, better profitability can be expected thanks to the recent refinancing activities, which helps raise our FY12F EPS target by 4.3%. We therefore maintain our BUY recommendation and raising our TP to Rp1,720. Valuation wise, our TP implies FY11-12F P/E and EV/EBITDA of 17.8-16.3x and 6.7-5.5x, admittedly at the high end, yet justified by the resurgent coal price which should translate into strong growth for DOID thanks to a higher volume of work.

Refinancing activities shall boost profitability
Buma’s refinancing activities should save DOID an estimated Rp312.7bn in interest expense payments in FY11F, or 48.4% lower than our previous expectation. DOID announced in November 2010 that Buma would refinance two of its loans - its bank loan of US$285mn and US$315mn of Guaranteed Senior Secured Notes issued by Prime Dig Ltd - with a US$600mn new five-year amortizing loan facility with an interest rate of LIBOR + 4.75% to withholding tax lenders (Buma will pay the grossed-up interest according to the lender’s prevailing tax rule) and LIBOR + 4.90% to withholding tax neutral lenders. This can be expected to save Buma a total of Rp1,4tn, compared to our previous forecast, for the next 5 years. Note that the Prime Dig Notes will be retired using a tender-offer mechanism at a price of $1,060 for each $1,000 of their outstanding notes, which we believe will incur expenses of US$18.9mn in FY10F, the amount paid above the book value of the loan.

The higher coal price means more work for contractors
We expect Buma’s coal production and overburden removal to grow by 15% in FY11F, in line with the average production growth for coal companies. This translates into coal production and overburden removal for FY11F of 40.3Mt and 339.3mnbcm, respectively. Supporting growth is the strong estimated backlog consisting of around 314Mt of coal and 2,470mnbcm of overburden removal at the end of FY10F. Also, with Buma’s firm estimated capex in FY10F of US$190mn, which mainly used for purchasing heavy equipments, will provide growth support going forward. With the coal price resurgent and the bad weather likely to come to an end in 1Q11, there is a good incentive for coal companies to increase production this year.

Potentially higher stripping ratio this year to lead into higher profit
We have been hearing that coal companies are considering taking advantage of high coal price to mine coal in deeper seams that is not economically recoverable during normal years. Consequently, this means a higher stripping ratio. Note that our sensitivity analysis suggests that for every 1% change in the FY11F coal production, the FY11F core profit will change 0.3%, while every 1% change in the FY11F overburden removal will mean a 2.1% change in the FY11F core profit. This clearly shows that a higher overburden removal (which means higher stripping ratio) benefits Buma. This year, the company’s profitability will improve, and we expect the FY11-12F EBITDA margin to normalize at 35.3-34.7%, in which one-off costs for items such as extra road maintenance and additional pumps installations in FY10F is not expected to occur much in FY11F.