Goldman gives BUMI a conviction sell due to weak core earnings TP 2,300 - Goldman Sachs

Key Summary Points:
· News FY10 net profit of US$311 mn was boosted by net one-off gains of US$274 mn (mainly gain on derivative transactions, gain on asset sale, forex gains but partly offset by interest on late payment of taxes and amortization expenses). On an adjusted basis, core PBT was 7% below our expectations. However, tax rates and minority interest were also higher than our expectations, and we estimate core net profit of US$162 mn (assuming one-offs are taxable) was 41% below our expectations, and 38% below Bloomberg consensus. Of the total net one-off gains, US$197 mn occurred in 4Q10, implying core net profit of only US$8 mn.

· Analysis Revenue was higher than our expectations, but gross margin of 37% was below our expectations of 42%, we believe due to higher cash production costs.Bumi has capitalized a further US$230 mn of cash costs into deferred stripping costs in FY10 (accumulated deferred stripping costs in the balance sheet now stand at US$473 mn). We note that Bumi wrote off US$275 mn of deferred stripping costs in FY09. Meanwhile, Bumi received proceeds from the sale of PT Mitratama (completed in 2Q10), but is yet to receive the proceeds amounting to US$290 mn from the sale of Gallo Oil done in 4Q09.

· Implications We expect a negative market reaction on these results. Bumi’s stock price has outperformed the market by 11% over last 3 months which we believe is overdone and the stock is trading at a 19%/23% premium to the Indo coal sector average on 2011E/12E P/E valuations. Our forecasts and 12-month target price are under review pending more details. We reiterate our Sell rating (on Conviction List) on the stock.