DOID: Right issue required… - Mandiri Sekuritas

Given robust coal demand, Buma, the principal operating subsidiary of Delta Dunia Makmur (DOID) would benefit from the robust backlog contract from large-reputable coal producers. From the current project we expect Buma’s EBITDA to grow by 16.3% CAGR10F-12F up to US$295mn. Strong operating cash flow should only cover existing project. To expand further, more capital is required since it will reach its credit limit in our view. If we considering equity recapitalization, followed by potential dilution on ROE, less attractive valuation is expected in the near term, but it’s better justified and represent better capital structure risk compare to peers (see exhibit 3). Stronger capital means further expansion and additional value cr eation. We initiate coverage on DOID with a Buy rating and TP at Rp1,600 implying 14.9xPER11F

Robust backlog contract. Buma enganges in a medium-long term coal mining services contract with large and reputable Indonesia’s coal producers such as Berau, Adaro, Kideco, Arutmin, and Bayan Group. Buma accounted around 17% market share of the aggregate coal production in Indonesia in 2008-2009. As of 31 December 2010, Buma has total backlog contracts for coal mining and overburden removal of 389Mt and 3,162mm bcm respectively, which worth more than US$6.0bn gross revenue.

Shareholders transformation. Last year DOID launched internal restructuring at shareholder level and debt refinancing that lowered its cost of debt significantly by more than 5%. The new shareholders of TPG Capital, Government of Singapore Investment Corporation Pte Ltd (GIC) and China Investment Corporation (CIC) have joined the investor consortium with non-voting interest in Northstar Tambang Persada (NTP), a 40% shareholder of DOID, likely to help clarify the ultimate owners of Northstar’s stake in DOID and should reduce earning risk.

Buy rating. We initiated coverage on the company with a Buy rating with TP of Rp1,600 per share implying 14.9xPER11F and 7.1x EV/EBITDA11F. We use blended method valuation combining DCF and relative multiples. We use WACC of 12.7% and target PER11F and EV/EBITDA of 15.0x and 7.0x respectively.

Underlying risks. The main risk faced by the company is related to possible changes or termination in contracts, increasing competition, government regulations, which will pose risks for its business continuity. Other risks include but not limited to fluctuation in fuel prices, materials, weather, and country risks.