BUMI, Plantations, Axiata XL - Nomura

Bumi Resources (BUMI IJ) management, Ken Farrell, said that in order to repay the US$600mn debt to CIC, the Company is assessing a couple of options, namely 1) cash settlement, 2) debt/equity swap, and 3) a combination of no 1 and 2. For the cash settlement, BUMI can sell its stake at Bumi Resources Minerals (BRMS IJ) to Vallar (VAA LN) and use the proceeds to pay the CIC debt. For the debt/equity swap option, BUMI can swap CIC debt with Vallar of BUMI shares. This explanation is in line with our view outlining three potential scenarios (swap the CIC debt with Vallar, BUMI, or BRMS shares) or a combination of three. We retain our Buy call on BUMI, price target Rp4,750.


Our plantation analyst, Ken Arieff, assess the availability of land for future palm oil expansion in both Indonesia and Malaysia. On our conservative assumptions, we find that Indonesia could run out of land for Palm Oil in 11 years time. Palm Oil is the only vegetable oil that grows quick enough to satiate world demand, and if land eventually runs out for the crop – this could lead to higher prices for vegetable oils in the longer term. Companies have been taking different approach to counteract this problem, some seek to increase their land banks in Africa, and the others focus on increasing yield via biotechnology. Ken maintains his bullish view on Palm Oil sector and Lonsum (LSIP IJ – Buy) remain as Ken’s top pick for Indonesian name.


We attended public expose for Axiata XL (EXCL IJ – Buy) and here are a few key takeaways from the presentation:

Shift from pricing strategy to churn management. With the growth of phone user volume and number of operators, the price elasticity for telco service has declined; subsequently the company will weight more on building customers loyalty with churn prevention rather than their usual price-oriented strategy. Everyday around 30K of XL SIM cards are sold (making up to around 1mn SIM cards sales per month), but long-term users are scarce.

A few steps are taken to keep the customers such as

(1) Launching of integrated operator portal “XLGo!” which aim to provide smartphone experience for non-smartphone users as only 1m (2.5%) of XL customers are smart phone/Blackberry users.

(2) Improving call and data transmission quality. Presently XL is in the midst of modernization; the existing BTS (base transceiver stations) will be replaced by ones supporting 3G and LTE (long term evolution) service. XL will allocate 45% of its total Rp5tn capex for data service (vs. 25% last year). Additionally, around 2,500 to 3,000 units of new BTS will be built this year.

(3) Increase product availability though better distribution channel.

Deleveraging continues: XL cut off 24% of their debt last year. From Rp7.2tn debt paid by company, 93% were early repayment and they are expecting free cash flow to be fluid going forward, allowing further debt reduction.

XL announce dividend of Rp911bn (DPS @ Rp107), giving 2% dividend yield and only marginally (8%) lower than our expectation. The dividend policy is for a minimum dividend payout ratio of 30% of normalized earning and XL plans to increase the pay out progressively as cash flows impove.