BUMI: Last hurdle - Investor?s confidence - Mandiri

In FY10 BUMI could still withstand the debt pressure. FY10 adjusted EBITDA of US$904mn plus income from associate of US$236mn and US$108mn in interest income, is enough to service interest and financial charges of US$630mn. We can’t exclude non-operating income as debt was incurred to pay the acquisition of non-core asset (NNT, Bukit Mutiara’s loan), therefore discussion on core profit is pointless. Survivability seems assured for now. Near-term catalysts will be Vallar’s 50%-plus ownership, which is expected to be completed by 1H11 and their deleveraging plan. Our target price remains at Rp3,665/share, pending announcement of new auditor.

Less worry on debt servicing ability. BUMI’s 2010 debt stood at US$4,181mn (2009: US$2,773mn) or 4.6x adjusted FY10 EBITDA (after deducting Tata’s 30% share in KPC and Arutmin), near 5.0x limit imposed by the CIC loan. We expect debt expansion to be minimal. With FY10 ASP of US$71/ton, cash cost of US$34/ton, BUMI can generate total income of US$1,248mn, sufficient to pay US$630mn interest. This year the ASP guidance is US$77/ton and cash cost of US$35-36/ton or 10% expansion in margin. Volume is estimated to increase from 60.4Mt to 65.0Mt, with minimum capex, since it is financed by vendors and contractors. We see more breathing room for BUMI and hence less worry in the financing as debt maturity is also extended to 2013 and beyond

All eyes on Vallar acquisition. As Vallar has announced their intention for a step-up transaction to increase its BUMI ownership from 25% to 50+%, the mystery is the process taken to achieve the goal. BNBR’s CEO indicated that the first step is an acquisition of 15% (total of 40%), to be followed by the next 11%. Vallar hinted the preference to invite current BUMI shareholders to convert their BUMI shares into Vallar shares, reducing the need for debt issuance by Vallar and enlarging the market capitalization base in which Vallar founders B shares incentive scheme based upon. Although market expects Vallar to buy the remaining BUMI shares they haven’t owned from the public, the likelihood will depend on the success of Vallar’s founders to persuade conversion.

Next: deleveraging. Post Vallar, BUMI will start the long process of gaining back investor confidence. The process could be sped up if deleveraging process accelerate, which in our opinion will involve asset divestment. Market will be monitoring the process to evaluate whether assets are sold at reasonable prices. Hopefully, UK Governance Code that Vallar plans to follow can be of a guide. We expect BUMI share price to have a solid base from now on, with upward momentum provided by the planned Vallar acquisition and deleveraging.