Visit to DOID - a turnaround story (increase ROE - reducing debt) - CIMB

We visited Delta Dunia Makmur (DOID IJ, market cap US$1bn) yest and basically we liked what we heard. It is a turn around story from negative earnings to positive earnings this year high ROE and significant reduction in leverage.

1. Revenue from BUMA, the wholly owned mining contracting subsidiary (similar to PAMA in UNTR) should increase because the stripping ratios in most of their clients are going up. With coal price of above US$90/t, mining companies can afford to operate on high stripping ratio areas, this usually would increase the margins for the mining contractors (as they move more earth). Berau Coal (BRAU IJ) is their major client with 29% of the mining contracts.

2. BUMA have ordered their heavy equipment during 2010 (mostly Catepillar machine). With these equipment, they would be able to increase the capacity by 25%. Consequently we could expect that volume would still be growing with better weather condition this year compared to last year.

3. They have no issue with spareparts supply as these spare parts from Hitachi have already arrived and Komatsu has committed to deliver by 3Q this year.

4. They just appointed Mr Sjamsi Josal to be their operation manager. It is an internal promotion and this guy used to for Theiss for more than 6 years.

5. Going forward..

DOID is focussing on debt refinancing (around US$600mn) to release them from the debt covenant which has 'waterfall' clause thus limit their capex capability. The waterfall payment last year was 10% of the principal and this year would be 10% of the principal (around US$60mn); and 13% for FY11 (US$78mn). The interest of 5.6% pa would be around US$34mn, resulting in total outflow of around US$94mn. A right issues would come in nicely in this kind of situation :)

After 3 years of not spending much on capex, the company needs to consider further expansion. In 2010, they spent US$209mn capex and plan to spend US$230mn this year, mostly funded by their internal cash flow (BUMA's EBITDA last year was US$227mn and this year is projected to be around US$250-260mn).

Let's work out the math. With EBITDA of US$260mn and debt repayment of US$94mn, the company would have US$166mn cashflow. Therefore, to finance US$230mn capex this year, they would still be short of around US$64mn financing. In order to execute the capex, they could do two things:
(a) they could ask for grace period on their loan ... (very unlikely they would get it, but with powerful shareholders everything is possible)
(b) a rights issue - our favourite solution :)

6. Valuations
The cash and equivalent as of Dec 31, 2010 was Rp553bn and total debt to Rp6,494bn, equity Rp135bn, resulting in net debt to equity of 44x .... hmmm so high. Net loss in FY10 was Rp159bn, slightly lower than Rp160bn net loss in FY09 on high financing charges. EBIT was Rp1.0tn in FY10, down from Rp1.2tn in FY09.

According to Bloomberg, analysts's average net profit for FY11 is Rp738bn and Rp945bn, which would give P/E of 12x for FY11 and 9x for FY12, looking attractive. So, analysts expect turnaround in earnings this year. Based on these figures, the net debt to equity would decline to 7x (from 44x) and ROE to reach 147%.

7. Share price performance + a liquid stock
The stock price performed strongly yesterday, up by 9% and 3% today. Over the last six months, the stock price rose 19% and 18% relative to JCI. The stock is also considered liquid with US$6.9mn daily turnover in the last six months.

8. Strong shareholders
Northstar holds a 40% stake in DOID with 60% freefloat. Under Northstar, there are Texas Pacific Group (TPG), GIC and CIC.