Bumi Resources (BUMI.IJ) - Removed from Asia Pacific Conviction Sell List but maintain Sell on rich valuations - Goldman Sachs

Key Summary Points:-

Low CROCI profile (4th quartile) – While Bumi’s core coal assets (KPC and Arutmin) are still generating strong returns, most of the company’s non-coal investments (except NNT) are currently not generating returns (some in exploratory stage). We notice a persistent rise in deferred stripping expenditure (capitalized US$230 mn in FY2010 – running at US$473 mn as of FY10) while Bumi wrote off US$275 mn of deferred stripping expense in 2009.

In addition, there has been a sharp rise in deferred exploration expense by more than US$1 bn over 2006-10. Market expectations are high - Our 2011E-12E net profit is 13%/27% below Bloomberg cons., mainly on higher production costs and we believe the market has not fully priced in the lower earnings from associate NNT’s gold and copper mine (24% of 2010 PBT) as the mine cut back production for expansion and will use a lower grade ore for the next 2 years.

Rich valuations: Bumi is trading at 13%/19% premium to peers on 2011E/12E P/E and more than 1 SD above its mid-cycle on fwd P/E. We fine-tune our 2011/12/13E EPS by +2.5%/+0.9%/+0.1% mainly on the back of FY10 reported interest expenses, and thus raise our Director’s Cut based 12-m TP to Rp2400 (prior Rp2300). Risks: 1) If coal prices spike sharply, 2) Some of Bumi’s investments are in exploration stage and we have not factored in potential earnings contribution, 3) If Bumi refinance CIC loan (19% IRR) at a lower interest cost, it may boost earnings.