Bumi Resources - Trying hard to be relevant again? - Macquarie Research

Event
§ We met with Bumi’s management and learnt that 1) refinancing of high cost debt is progressing well; 2) there is more clarity around Bumi & Vallar integration strategy (which could potentially improve perception of governance) and 3) capacity expansion plan is on-track. These, combined with the leverage to a high coal price, reiterates our Outperform recommendation on the stock. However, we acknowledge the company’s corporate governance history and therefore we prefer Harum (Rp8, 450, OP,TP:Rp11, 500) and SAR(S$2.41,OP,TP:S$2.35) to play the coal price cycle.

Impact
§ Deleveraging is the key focus. Bumi announced that it aims to reduce its debt position by roughly US$1bn in 2011 (US$300m of convertible bonds and US$600m of 1st tranche of CIC loan). The company is going to exercise the 2 years’ early repayment option on the CIC debt, which has an original expiry schedule in 2013-15. We understand that Bumi will incur around 5% of repaid amount due to the early repayment penalty. We foresee roughly US$10m (1.3% of 2011 net profit) and US$96m (12% of 2012 net profit) of cost savings (after tax) in 2011 & 12 from the deleveraging process. Further, we also understand that the company is looking into the possibility to convert a portion or all of the US$1.9bn high-interest CIC debt into equity at the Vallar level (which would lead to US$271m p.a. of cost savings or 30-35% of the 2011-12 net profit).

§ Vallar aiming for inclusion into the FTSE100 by June 2011 via a consolidation of Bumi into Vallar, adoption of IFRS accounting, and a Big 4 appointment as external auditor. For consolidation to happen, we understand that Vallar is trying to increase its ownership in Bumi from 25% to 51% (via potential conversion of existing Bumi’s family & friend shareholders into Vallar) or proving perceived control over Bumi.

§ Capacity expansion is on the way. We forecast the company will increase its production from a slump year of 60mt in 2010 to 67mt in 2011. Going forward, the company highlights that its 100mt long-term production plan (at KPC and Arutmin) is mainly driven by: 1) the completion of a conveyor belt at KPC; and, 2) demand for low grade coal (i.e. Mulia and Asam2 coal). The company has appointed Roberts & Schaefer as the EPC contractor for the conveyor belt, which it believes will be completed by 1H12.

§ Valuation is attractive… but beware of governance. The company currently trades on 8.5-9.0x 2011-12 earnings forecasts vs the historical sector average of 13x with potential improvement in perception of corporate governance and therefore valuation re-rating.

Earnings and target price revision
§ No change

Price catalyst
§ 12-month price target: Rp3,800.00 based on a Sum of Parts methodology.
§ Catalyst: Higher coal price and production and deleveraging of high cost debt

Action and recommendation
§ We see upside to the current share price (in line with our Outperform recommendation) given the company’s high leverage to coal price and attractive valuation (but beware of governance risks). It is currently trading on our 2011-12 forecast on 8.5-9.0x PER vs. historical sector average at 13x.