BUMI: Deleveraging to pay off - Mandiri

BUMI adjusted its accounting policy to comply with the IFRS. This, however, has minimal impact on its bottom line. Meanwhile, BUMI's real assets value and earnings are subject to future auditor assessment, in our view, as we noticed a discrepancy between PWC and Mazar’s accounting treatment on BUMI’s bottom line. PWC reported a net loss of US$ US$302mn for FY10 in Bumi Plc/s prospectus while Mazar reported a net profit of US$311mn. Consequently, if PWC is finally appointed, a downgrade in assets and earnings is likely. Yet, on the other hand, this would increase investor's confidence. We view that Bumi Plc's share should trade at a minimum 20% premium over the exercise price of its convertible bond (CB) worth US$2.07bn to be attractive. We adopt blended valuation methods to arrive at a new TP for BUMI of Rp3,700/share (slightly higher from previous TP of Rp3,665) which is still 12% discount from its NAV of Rp4,200/share (after conservatively excluding Dairi and Newmont assets value following the sale of 75% stake in BRMS). We maintain our Buy rating.

Cost increases faster than expected. Excluding the non recurring gains (forex gain, sale of investment and gain from derivative), the core pretax profit in 1Q11 was US$82mn, up 18%yoy. However, it is still below our expectation mainly caused by cash cost hike to US$48-49/ton (excluding royalties) higher than our previous expectation. Coal production growth in 2Q11 will be moderate at 15Mt since it remains wet. But it will be ramped up to 18-19Mt in 3Q-4Q11.

Unit of production depreciation method could reduce margin in later years. Applying unit of production depreciation method is only favorable for BUMI’s earnings in early years. But in later years, higher % of production followed by discounted selling price (due to increasing EcoCoal portion significantly and lower of Bituminous coal) could potentially reduce BUMI’s margin in later years. We have incorporated these into our forecasts.

Early repayment debt to CIC potentially worth US$2.8bn market capitalization. BUMI has clarified that CIC wants cash payment. But, it remains unclear whether it refers to the whole debt of US$1.9bn or only the 1st tranch of US$600mn that will be repaid in Oct 2011. BUMI last week indicated that they are still renegotiating with CIC for potential debt swap for the remaining tranches. The sale of 75% stake in BRMS is part of BUMI’s deleveraging plan by removing US$238mn BRMS’s loan carried on BUMI’s balance sheet. If BUMI successfully monetize the CB and deleverage its debt, our calculation shows that early repayment debt to CIC potentially save US$282mn which potentially raise BUMI’s market cap by US$2.8bn.

Reiterate Buy, potential upside remains from deleveraging and refinancing. We lower our earnings forecast mainly due to more conservative cost structure and earnings reduction from BRMS. BUMI has indicated its plan to refinance its loan at lower interest rate following its healthier balance sheet, which could bring upside potential on its future earnings. We reiterate our Buy rating with new TP of Rp3,700/share implying 16.9x adjusted PER11F.