Bumi Resources - Too complicated for now; rating cut to U/P PO 2.900 - BoAML

Sector: Bumi Resource (Bumi IJ)
Price: Rp 3,025
Recommendation: Underperfrom (PO Bt2,900)
Market Cap: US$ 7,287mn

Another restatement in 1Q11
From 1Q, BUMI Resources started applying International Financial Reporting Standards and only does proportionate consolidation (ie it only consolidates its 70% stake in Arutmin and 65% stake in KPC vs. previous method of consolidating 100% and taking them out at MI). We advise investors to use the historical figures for BUMI in Bumi PLC’s prospectus as a comparison. It seems those figures have applied IFRS.

BUMI was loss-making in 2010: PwC report
According to Bumi PLC’s prospectus prepared by PricewaterhouseCoopers LLP, BUMI posted a net loss of US$302mn in 2010, compared to a profit of US$311mn reported in BUMI’s 2010 financial statements released on 1 April. The key differences (putting aside the application of IFRS) we noticed are much lower EBIT and US$283mn impairment loss on termination of sales of BUMI’s 20% stake in Gallo Oil to Florenceville (see the complete table in page 3).

Analysis of 1Q numbers: cost surging up, NP disappointing
Due to the IFRS restatement, we are only comparing BUMI’s 1Q headline NP with our FY estimate. From our estimates, we found: 1) If we strip out gain from derivative transaction, BUMI’s net profit would come in at US$53mn (10% of our full-year estimate; 2) Unit cash cost ex. Royalty in 1Q rose US$6/t from 2010 average (or 17%); 3) Selling expense in 1Q rose US$1.32/t from 2010 average (or 24%); 4) Total debt as of March rose by a slight US$19mn from December 2010.

Cutting earnings estimates
We cut our earnings estimate by 11% for 2011 and 31% for 2012 (we took out
BRM contribution as it will be transferred to Vallar). Still, we see downside in our 2011 earnings considering 1Q EBIT accounts for 16% of our full-year estimate as we give BUMI benefit of the doubt for higher ASP and lower stripping ratio in the next 9 months. We cut our PO by 13% to Rp2900 (13x 2012E PE) assuming CIC’s US$600mn got repriced.

Too complicated and not that cheap
Coupled with US$2bn bond issuance by Vallar to BUMI, which would be earnings dilutive and have no direct cash flow, we find BUMI too complicated. It is not exactly cheap also (do note 1Q results were not audited by PwC). Assuming no debt, or EBIT time 45% tax rate, BUMI would still trade at 10x 2011E and 9x 2012E PE. We cut BUMI from Neutral to U/P. For direct coal play, we prefer ADRO, SAR or ITMG.