Bakrie-Vallar updates - CLSA

Last night Nick Cashmore went to the dinner at Four Seasons Jakarta for the official closure of the Bakrie-Rothschild deal. This follows Friday's purchase of 75% of Berau by Vallar and the earlier purchase of 25% in Bumi. Vallar (VAA LN) will be renamed Bumi Plc on May 10.

Some key takeaways:

* Bakrie group is understandably very pleased to have closed the deal; they see this as the internationalization of the group.
* They have been speaking to institutional investors to swap their shares in Bumi for Vallar. Indicative terms are 57.7 BUMI sh for 1 VAA sh, according to local press which at current VAA price translates into a swap price of Rp3150/sh.
* They could do a preemptive placement of 10% in Bumi to repay the debt and swap the shares into VAA shares.
* They now want to lift VAA's stake in Bumi to 40%+ (from 25%) and hope to complete this in May this year.
* Separately, the group has said it wants to repay $375m of convertible debt this year plus $600m of the first tranche of expensive CIC debt in Oct.
* The group sees itself producing 140mt of thermal coal by 2013; a bit ambitious in our view given production constraints but their conveyor-based infrastructure gives the group a real cost advantage over those who rely on trucking the coal out from the pit.

We like BUMI. BUY with TP of Rp4,000.

One memorable quote from the dinner:
"If you place an order today for mining equipment, it will take you 24 months to get physical delivery," the CEO of a mining contractor working at Arutmin mining site - doing 3.5m tonnes a year - who sat beside Nick at dinner.

Clearly, it is a great time to be a heavy equipment maker. The key here is to watch if the heavy equipment makers have the capacity to supply, post Japan earthquake. CLSA Japanese research team just came out with on-the-ground research CLSA style in the areas impacted by the earthquake.

For Hitachi Construction Machinery (Hitachi Indo distributor is HEXA IJ), it looks like all plants are up and running but struggling to recover utilisation rates, particularly in Ibaraki (full car parks suggest it is back to normal but no machinery is seen coming out). Due to severe damage at the Hitachinaka port, we are likely to see delayed shipments. Ibaraki factory has a high export portion to Indonesia.

For Komatsu (Indo distributor is UNTR IJ), all Komatsu plants are back up and running, factory utilisation rates are recovering at Oyama and Hitachinaka. For Komatsu “mother” plants, there is no sign of damage. Construction machines being driven out, but inventory seems high highlighting problem in shipping the goods.

Main impact would likely come from delayed shipments of mining machineries made at Hitachinaka due to the port destruction. Inventory has built up around the factory while the local government prioritises port reconstruction.