DOID: Purgatory - Mandiri

The year 2010 was notable as the “cleaning-up year” from the new shareholders. Buma has settled a fuel charge dispute with Berau Coal in 2008 caused by the old shareholders. Buma has booked impairment of around US$21mn regarding the total dispute amount of US$42mn where Berau will only pay 50% of the amount in 36 equal monthly installments. Buma also reported Rp335bn in extraordinary expenses associated with the US$600mn loan transaction end year 2010 and also provisioned US$8mn for its undeveloped land in Balikpapan from its old subsidiary. We expect stronger balance sheet to come and rising confidence on the company following the ongoing transforming process in the company.

Buma’s FY10 recurring net profit in line with expectation. Buma reported FY10 recurring net profit of US$47mn, in line with our forecast of US$48.7mn. Overburden (OB) removal and coal production grew by 5.2%yoy and 6.9%yoy, respectively to 292.2mmbcm and 35.0Mt. Buma’s FY10 net revenue (excluding fuel) grew 15% yoy US$580mn, but it was flat at Rp5,256bn due to 12% yoy appreciation of the IDR. Buma’s FY10 EBITDA grew 12% yoy to US$227mn, translating into 39.1% margin.

Other extraordinary expenses expected in 2011. We expect another extraordinary expenses of around US$16.5mn if the new refinancing transaction done this year. So conservatively we have taken into account this cost in our model due to its high possibility. Consequently it cuts our FY11F net profit by 37.1% to Rp450bn.

Changes of guard. In February 2011, the company approved to accept the resignation of Johan Lensa as President Commissioner and Ahmad Kharis as a Director effective January 31, 2011. Subsequently they appointed Hagianto Kumala as President Commissioner, Akhil Puri (TPG’s operating team) as Commissioner and Sjamsi Josal as Director of Buma. And in March 2011, the company also appointed Ashish Shastry (Managing Director and Head of Southeast Asia at TPG Capital) as Commissioner of Buma (please see exhibit 3 for their CV). We believe this should raise confidence of the market on the company.

Maintain buy, lower TP. Despite its underperformance, we still believe that a better future is coming. We expect stronger capital should come, a lower interest expenses, and many big projects to be awarded would give high value creation to the company. We tag lower TP of Rp1,400/share. Our TP implies 15.8x adjusted PER11F, excluding the extraordinary refinancing fee of US$16.5mn, otherwise it implies 20.1x PER11F. DOID still offers attractive PEG ratio of below 0.5x. Maintain Buy.