Bumi Resources - 1Q11 results: Strong but below expectation - JP Morgan

1Q11 results strong but below expectations due to costs: BUMI
reported a 1Q11 net income of US$112MM, down 15% Y/Y from US$132MM in 1Q10. However, excluding non-recurring gains and losses, 1Q11 core net income was US$59MM, up 19% Y/Y from US$49MM, which shows a strong performance. As non-recurring items have historically distorted BUMI’s net income, an analysis of the operating profit reveals the company’s performance in 1Q11. After adjusting for the 30% non-controlling stake in KPC and Arutmin (as required by the IFRS), BUMI’s 1Q11 operating profit of US$219MM is below both the consensus’ (18%) and J.P. Morgan’s (16%) operating profit expectations of US$1.2 bn and US$1.35 bn, respectively. Much of the shortfall is because the costs rose from US$49/ton of coal in 1Q10 to US$64/ton in 1Q11.

1Q11 ASP at US$87 per ton: The recorded volume (before the adjustment of Tata’s stake) for 1Q11 was 14MM tons and the average 1Q11 ASP was US$87/ton, which is significantly higher than the US$77/ton originally guided by BUMI back in Apr-11 and US$63/ton recorded in 1Q10. BUMI has provided a new and higher ASP guidance
of US$90/ton for FY11E, while retaining the FY11E volume guidance of 66MM tons.

Deleveraging process has accelerated: BUMI continues to reiterate its deleveraging efforts, by repaying the 19% CIC loan, whose first tranche of US$600MM will be prepaid in Oct-11. Another recent action is the US$2 bn convertible bonds issued by Vallar to purchase 75% of BRMS. According to BUMI, the convertible-bond issue is another tool to raise additional funds to further deleverage its balance sheet, as BUMI can sell the bonds to investors, who wants exposure to Vallar’s shares.

We are restricted on BUMI: Currently, J.P. Morgan is restricted on BUMI and cannot give any rating recommendation or disclose its price target. We will follow up with more details.