Bumi Resoruces - Still hot - (BUMI-BUY-IDR3,350-TP:IDR4,200) - Bahana

45% contracted = Substantial upside from coal prices; BUY
We expect Bumi Resources (BUMI) to experience 44% y-y net profit growth backed by 9% y-y increase in production volumes to 66m tons, and 14.3% y-y increase in average selling prices (ASP) to USD81.2/ton, in line with the company’s new guidance of USD80-85/ton. Currently, BUMI is 45% (28m tons) contracted on volumes and price, implying substantial upside assuming coal prices remain strong throughout 2011. Our sensitivity analysis shows that every USD5/ton change in the coal benchmark price would impact our 2011 earnings by 10%. With high oil prices supporting coal prices, we maintain BUY with IDR4,200/share TP.

Vallar, deleveraging to improve sentiment going forward
CIC USD1,900m debt, 47% of BUMI’s total debt of USD4,181m, has 2013-15 repayment schedule of respectively USD600-600-700m, which BUMI plans to wholly prepay over a two year period in 2011-2013. While we have put the first tranche in our forecasts only (ex 13-14), it is worthwhile to put this plan into perspective. On the first tranche, there will be a 5% prepayment liability or USD30m, but would be more than offset by USD228m interest savings for 2 years (USD144m/ annum). While not confirmed by BUMI, we believe there could be a number of ways this prepayment could be achieved, including the use of its operating cash flow, raising some lower cost debt, stake sales in Bumi Resources Minerals (BRM) or share swap with Vallar’s shares, BUMI’s shares or BRM’s shares. Regardless of how this develeraging process will unfold, we believe sentiment on BUMI will improve as gearing falls. On Vallar, through the stake purchases of 25% in BUMI on 4 March 2011 and 75% in Berau Coal on 7 Apr 2011, it now controls two Indonesian entities which produce 80m tons of thermal coal, making Vallar the world’s largest seaborne thermal coal producer. We understand that Vallar may lift its stake in BUMI to 51% by May 2011, most likely through a share swap. Irrespective of continued market speculation as to who is really behind Vallar, we believe this deal will help improve BUMI’s future corporate governance. Separately, Bumi also plans to sell its 20% stake in Gallo Oil (USD290m), pending the Yemen government’s approval, to support its capex at the Gallo Oil.

4Q10: Way above consensus; 2011: Net income to jump 44% y-y
On 15% y-y volume growth to 15.9m tons and 2% higher ASP to USD75.7/ton, BUMI’s 4Q10 revenues increased 15.5% q-q while COGS only jumped 13.9% q-q even on higher overburden removal to 633mbcm (+36% q-q) and higher fuel cost. Helped by lower opex, 4Q10 net earnings jumped 89% q-q to USD116b, which brought 2010 net profit to USD311m (+63.4% y-y), some 10% above ours and 19% above consensus estimate. However, in 2011, we cut our earnings by some 5% on the back of spill over effects of 2010. Thus, we expect BUMI to report 2011 net income of USD451m (+44% y-y), as equity in net income of associates will fall from USD236m to USD150m on lower dividend incomes as Newmont expects lower production.