DOID:Short-term pain, long-term gain - Mandiri

We have made a 50-59% downward adjustment to our FY11-12F net profit forecast for DOID, following the release of its 1H11 results. We and the consensus may have underestimated the heavy re-investment needs, double declining depreciation effect, employee turnover, and cost structure changes following the change of shareholders. We are hopeful that DOID can migrate out of its punitive double declining depreciation policy to straight line by YE11 that could soften the blow to earnings. While we acknowledge that the stock may need time to win back investors’ trust, we are keeping our Buy rating based on the promising industry outlook, strength of new shareholders, and DCF upside potential. Assuming successful adoption of straight-line accounting, we value DOID at Rp1,220/share based on blended approach, implying 15.2x adjusted PER12F and 28.4% potential upside. A lot of the negatives have been priced in, considering the severe underperformance to the index over the past 12 months and Rp1,100 entry price by the new shareholders.

Operationally improve. Buma is currently aiming OB activities up to 32-33mn bcm per month in 2H11F about 15-20% increase from 1H11 monthly average volume. In 1H11 OB removal achieved 155.7mn bcm or represent 43.3% our FY11F, slightly below our expectation considering seasonal factors in 1H11 and some new fleets have not yet commenced operation.

SL is important for public investor. Buma’s CFO, Mr Sujoko Martin, highlighted that investment decision should not merely affected by depreciation method. Instead, investor should focus on operational improvement. However to get fair comparison with peers changing into Straight line method (SL) is considered as a critical factor in our opinion. Currently Buma is still reviewing and analyzing the cost and benefit of changing its depreciation method since it could affect it historical asset’s value and might create some asset impairment.

Labor incentives and cost remodeling for a better future. Buma’s legacy fleets from the old owners, Mr Johan Lensa, were not well maintained in the past which created unexpected expensive costs which lead to asset replacement. At the same time, high quality labor forces are required to support the company’s operating improvement. Therefore, some incentives and cost structure remodeling would be necessarily to bolster the company’s long-term outlook.

Maintain Buy – lower TP. DOID’s inexpensive valuation somewhat has been factored in by the market based on its existing project. In our view, DOID’s earnings growth catalysts mainly are future projects and change on its depreciation method. We have rolled into 2012 valuation and adjusted for SL’s earnings version vs DD’s version in our earnings. We maintain our Buy rating with lower TP at Rp 1,220/share implying 15.2x adjusted PER12F and 6.5x EV/EBITDA12F.