Delta Dunia Makmur Seasonally weak operational results - Danareksa Sekuritas

Maintain BUY despite Buma’s seasonally weak 1M11 operational results
Yes, the January figures are weak, but it is still far too early for us to make any adjustments to our forecasts. This is because: 1) January and the other months in the first quarter of the year are typically weak and 2) the high implied stripping ratio for January may confirm our belief that coal companies are increasing their stripping ratios this year. As a consequence, we maintain our TP at Rp1,720, implying 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.

The first quarter has always been the weakest quarter
Buma’s production is slightly down to 2.6Mt of coal (+0% yoy) in January 2011, although the overburden removal is up 33.7% yoy to 25.8mnbcm. However, we don’t find this surprising since January’s production has historically been lower than December’s production due to the impact of harsh weather on the company’s operational performance. Good news can be expected, however, since the Australian Bureau of Meteorology noted in February 2011 that the La Niña weather phenomenon is showing signs of weakening, adding that it expects a return to neutral weather conditions by winter 2011 (or June 2011 in Australia). With better weather, coal and overburden removal should become easier.

A higher stripping ratio this year?
The implied stripping ratio for 1M11 is higher at 9.9x. This is unlike the case in previous years since the stripping ratio in January has typically been at its lowest in this month. So what has happened? Well, we believe that the higher implied stripping ratio is due to either 1) coal companies deliberately increasing their stripping ratios in light of the strong coal prices, or 2) coal companies conducting more pre-stripping activities in order to get ready for better expected weather and to subsequently push for more coal production thereafter.

Benefitting from higher overburden removal
Nevertheless, we believe that Buma will benefit from the higher overburden removal since Buma - like other mining contractors - obtains most of its revenues from overburden removal. Our sensitivity analysis suggests that for every additional 1mnbcm of overburden removal, DOID’s FY11F expected core income will increase by Rp4.4bn, while for every additional 1Mt of coal production, DOID’s FY11F expected core income will increase by Rp5.0bn.