Bumi Resources : What’s the upside? Sell TP IDR 2800 - UBS Global Equity Research

Share price has started to factor in blue-sky scenario
Following Bumi Resources’ (Bumi) London listing through Vallar, the share price is up 28% and has started to factor in an improvement in corporate governance, strong volume growth and a potential reduction in abnormal fuel and interest costs. The company is now trading at a 20-25% premium to the sector average.

What’s the upside?
Our sensitivity analysis suggests the share price now partially reflects a normalisation of interest costs (most likely through a debt-to-equity conversion of China Investment Corporation’s US$1.9bn loan). It also reflects a reduction in fuel purchase costs (from a related party), partial execution on volume growth, a lower beta and higher selling prices. A full normalisation of costs and volumes renders a blue-sky valuation of Rp4,200 per share, which is 20% above the current level.

What are the risks?
We identify three primary risk factors. Firstly, Vallar’s original founders, spearheaded by Mr Rothschild., have less than 7% ownership interest in Vallar, coupled with very generous fees equivalent to 17% of the market cap. This could result in a founder exit in less than 12 months following a more than US$700m payout. Additionally, we raise questions about Bumi’s fuel purchases from a related party, Petromine, while various tax evasion issues remain unresolved with the government.

Valuation: maintain Sell rating and Rp2,800 price target Our price target is based on a 12.1x target PE and a 14.8% COE.