DOID IJ: PT Delta Dunia Makmur : Restructuring ushers a new beginning; initiating with Buy - BUY TP 1350 - BoAML

Kicking off coverage with a Buy rating
We initiate PT Delta Dunia Makmur (DOID) with a Buy. DOID, via its 100%-owned subsidiary BUMA, is Indonesia's second largest local coal mining contractor in terms of coal output. It was listed on IDX in June 2001, acquired BUMA in Nov 2009, and is 40% owned by consortium, i.e. Northstar Equity Partners, TPG, GIC, & CIC - the latter 3 replacing Indra Wijaya since Dec 2010.

Five key reasons to buy DOID
1) A much more compelling valuation than UNTR (PUTKF, IDR20,000, C-3-7), trading at 33%/38% discount to UNTR's 2011/12E EV/EBITDA and at 26%/19% discount to UNTR's 2011/12E PE (after adjusting the depreciation and one off cost); 2) our DCF derived PO implies 35% upside potential; 3) we are upbeat on Indo coal volume ramp-up and DOID is a direct beneficiary; 4) weak 2Q headline NP seems priced in; and 5) we see near-term catalysts from new projects.

Weak 2Q headline net profit looks priced in
Consensus' FY11 NP stands at 2.5x (US$40mn) above our estimate. We believe the Street has underestimated depreciation and refinancing cost. But considering the stock is trading at the low end of the P/E and EV/EBITDA band, we think the market has already factored in somewhat bad 2Q earnings. While we see modest impact to share price, this will not impact our positive 12-month view on the stock.

A direct beneficiary of Indonesia coal ramp-up
We believe Indonesia's coal production will grow at 8% p.a. over the next three years supported by strong growth in seaborne coal demand, especially from China and India. We see DOID is now well positioned to capture a fair share of the growing business, thanks to improved balance sheet & capital management.

Stronger balance sheet after 18 months of restructuring
After its leveraged buy out (LBO) of BUMA in Nov 2009, DOID refinanced BUMA's loan twice (US$800mn last month), which saw its interest rate halved; its tenor and average loan life doubled; and debt to EBITDA ceiling going up by 0.75x. Post refinancing, BUMA is no longer faced with an excess cash flow sweep covenant for repayment of senior lenders. It has announced a US$138mn rights issue, which would ease its balance sheet further & remove share-price overhang.