Bumi Resources (BUMI-BUY-IDR2,675-TP:IDR3,400) Pricing in more conservative volumes - Bahana

6% per annum volume growth in 2011-13
Bumi Resources (BUMI) is the biggest coal company in Indonesia with total reserves of 2.86b tons (exhibit 7), producing the largest 1H11 volumes of 30m tons (-4% y-y) in the sector. We note that BUMI’s 1H11 domestic coal sales jumped 4x y-y to USD679m, some 38% of total (exhibit 8 & 9), helped by volume take up from PLN, the state-owned electricity company. Going forward, we expect less rain to allow production volumes to further improve over 1H11 level, reaching 34m tons, bringing full-year figure to 64m tons (+6% y-y), before slightly rising to 68m tons (+6% y-y) in 2012. Note that these figures are lower than our previous estimates of 66m tons in 2011 and 78m tons in 2012. Although BUMI expects production volumes to reach 100m tons in 2013, we have applied a much more conservative assumption of 72m tons (+6% y-y) in production volumes, increasing by an average growth of 5% per annum (pa) thereafter (exhibit 10). This is reasonable in our view given that in the last five years, BUMI’s production volume growth averaged around 6% pa.

Lower sales, higher margin assumptions
On BUMI’s coal, we have applied lower 2012-13 sales volume assumptions, as discussed above, compared to our previous forecasts. However, this is offset by higher ASP assumptions (exhibit 11), which only resulted in slightly lower 2012-13 top lines (exhibit 12). Therefore, while we expect lower revenues, margins will still be higher (exhibit 6). We expect BUMI’s 2012 operating and EBITDA margins to improve to 35% and 40% respectively, before slightly decreasing in 2013 and flattening afterwards (exhibit 13).

Net gearing to fall to 181% by 2013
On the net profit margin front, we expect a significant jump in 2011, as a result of USD213m derivative gains posted in 1H11 (exhibit 14), but still lower than the company’s peak in 2008 (exhibit 13). In 2012-13, however, we expect net margins to be maintained at the 14% level, helped by lower net interest expenses as BUMI’s net gearing falls from nearly 303% in 2011 to 228% in 2012 and 181% in 2013 (exhibit 1). Nevertheless, we note that BUMI remains as the most leveraged coal company in our coverage with high average cost of debt of around 15%, which we expect to fall to 14% in 2012 and to 13% in 2013, helped by the company’s plan to refinance.

27% upside potential + 17% market underperformance = BUY
We like the fact that BUMI’s net gearing is falling over time. This should improve sentiment on the counter over the medium term in our view. On valuation, the impact of our decreased volume assumptions is a lower target price (TP) on BUMI to IDR3,400 (from IDR4,200 previously), following the application of lower WACC assumption of 10% from 10.8% previously and new terminal growth rate of 1.5%. Therefore, 27% upside potential to our TP coupled with 17% ytd market underperformance (exhibit 5) have us reinitiating coverage on BUMI with a BUY.