Vallar : BUMI’s panacea? - Mandiri Sekuritas

The completion of the transfer of a 25% ownership of BUMI from the Bakrie Group to Vallar in return of ownership in Vallar, we believe, is a game changer. However to be positively convinced we need one more action : change BUMI’s auditor. As Vallar promised an accountable board of directors free of interference from the Bakrie Group (it is sealed in ‘Bakrie Relationship Agreement’), BUMI’s discount to peers is expected to narrow. However we also caution investors of BUMI’s FY11 net income. Should the new auditor apply stricter accounting rules we might see charge-offs applied. Our NAV calculation brings a valuation of Rp4,714/share. We will maintain our target price, and look for upgrade after announcement of a change in the auditor.

What’s in the UK Governance Code? Excerpts from the Code: Every company should be headed by an effective board which is collectively responsible for the long-term success of the company. There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.

What’s in Bakrie Relationship Agreement? The agreement is made between Vallar and members of the Bakrie Group (Bakrie Brothers and Long Haul). The principal purpose is to ensure that Vallar is capable of carrying on its business independently of the Bakrie Group and its associates and that all transactions and relationships between the Company and the Bakrie Group are at arm’s length and on a normal commercial basis.

What are signals of improved governance? One signal of change should be a new appointment of BUMI’s auditor. Should BUMI divest Bumi Mineral Resources, we also expect it will be made using credible appraisals.

Expect charge-offs. If BUMI decides to change auditor, we should caution of potential charge-offs if the new auditor applies stricter accounting rules. Although comparison might not be applicable, deferred mining expenses/total asset excl Newmont Nusa Tenggara (NNT), Dairi in BUMI reached 22.0% (9M10), while ITMG’s was 8.5% (12M10). However we view it positively. Using reserves reported in the prospectus, added with NNT and Dairi Prima acquisition prices, and deducted with debt (including unamortized cost and discount), deferred assets, other assets, and several non-debt liabilities (Exhibit 4) result in NAV/share of Rp4,714. At thi s point, we are maintaining our target price of Rp3,665/share and wait for change of auditor to take place.