Delta Dunia Makmur - On the move (DOID-BUY-IDR1,185*-TP:IDR1,600) - Bahana

Positive impact on the upcoming IDR1.3t rights issue
With the upcoming fund raising of around IDR1.3t (USD150m) through rights issue, Delta Dunia Makmur (DOID) remains on course with its capacity expansions plans. The term of the rights issue would be 500 old shares for 79 (500-for-79) to 112 new shares (500-for-112) with exercise price of between IDR850-IDR1,200. We believe that this upcoming rights issue should be viewed positively as 60%-70% (IDR780b – IDR910b) of the net proceeds would be allocated to BUMA for heavy equipment purchases (Organic growth) and potential acquisitions on coal-related business (Inorganic growth). In addition to these expansion plans, this rights issue would improve DOID’s 2011 debt profile, lowering the net gearing level to around 226% from 796% in our previous estimate. This would allow more flexibility for DOID to secure additional financing for further expansions going forward.

New USD800m loans to lower financing costs
Simultaneously, DOID has secured USD800m new financing arrangement from 10-bank consortium. Most of which (around USD650m) would be used to refinance its existing bank loans while the remaining of USD150m would be allocated to further support DOID’s capacity expansions plan. This coupled with the rights issue proceeds of USD150m would bring total availability cash for expansions to USD300m. It is worth noting that the new loan agreement would be beneficiary for the company given 100bps lower interest costs and more lenient covenant structure (exhibit 13). Taking into account this new financing agreement, we have lowered our 2011 interest expense by 40bps to IDR406b from IDR422b in our previous estimate. Note that while the impact on absolute value may not be significant, implied interest expense of around 5.4% - 6.4% are much lower than what the company had to pay at around 15% in 2010 loans.

Expansions on the cards; retaining BUY with TP of IDR1,600
While DOID’s rights issue plan and refinancing would result in major improvement in its capital structure, the impact on 2011-12 earnings would be somewhat limited. The additional borrowing worth USD150m would offset the positive impact of lower interest rate arising from the financial restructuring. On the production front, we remain optimistic that DOID would deliver higher 2011 production on higher capacity on sites. This resulted in 4M11 coal extraction of 10.5m tons (-1.9% y-y) and overburden removal of 100.6m bcm (+19.5% y-y). While 4M11 coal extraction grew at flat rate, we believe that our full-year revenues assumption will remain intact, given more than 80% contribution from overburden removal and production acceleration in the subsequent quarters. In the longer term, with annual Capex of around USD250m for further capacity expansions in the next two years, we expect earnings to move ahead at CAGR of around 36%. Note that with all of the provisions incurred in 2010, we do not expect additional extraordinary losses to persist in 2011 onward. This coupled with higher production outlook have caused us to maintain our DCF-based TP of IDR1,600. BUY.

*Theoretical ex-rights price based on IDR1,260