Bumi Resources (BUMI.JK) Upgrade to Buy: Leveraged Play on Better Thermal Coal Outlook
v Upgrade to Buy/High Risk; Raising target price to Rp3,800 — Robust earnings growth outlook and high FCF yield lead us to upgrade our rating to Buy/High Risk from Sell/Speculative. The market is pricing in benchmark coal price of c. US$76/ton; meaning upside risks to our US$80-90/ton forecasts for 2010-11. v Supportive coal price outlook — Citi’s commodities team recently raised its thermal coal price forecasts for 2010-11 to US$80-90/ton from US$70, citing structural improvement. Prospects of China becoming a sustained net importer of coal provides upside risks to medium and long-term coal price forecasts. v Sanity check — Our IDR3,800 target price imputes an EV/reserve of USD5.4/ton (6.8% of 2010E Japan benchmark price of US$80/ton). This compares favorably with the implied EV/reserve from Tata’s acquisition at US$4/ton (7.3% of 2007 benchmark price of US$55/ton). Our ‘floor valuation’ estimate is Rp2,700/share based on DCF and Tata’s implied EV/reserve valuation. v Convertible Bond – Double-Edged Sword — With coupon rate of 9.25%, Bumi’s latest US$375m convertible bond is not cheap. Bumi’s capped call option reduces the potential dilution risk while its equity swap position (essentially a leveraged long position in Bumi’s stock) is an unequivocal signal to us that management is bullish on Bumi’s medium and long-term outlook. v Transfer of Coverage — We are transferring coverage of BUMI.JK to Kim Kwie Sjamsudin from Margarett Go. This e-mail is confidential and intended only for the use of the individual or entity named above and may contain information that is priviledged. If you are not the intended recipient, you are notified that any dissemination, distribution or copying of this e-mail is strictly prohibited. You may from time to time be provided with investment and financial related information and reports, including but not limited to, research reports and market or securities specific analysis. Please note that the information is provided to you for information only. All of the information report and analysis made should be taken as having been prepared for the purpose of general circulation and without regard to any specific investment objective, financial situation or the needs of any particular person who may receive the information, report or analysis (including yourself). Any recommendation or advice that may be expressed in or inferred from such information, reports or analysis therefore does not take into account and may not be suitable for your investment objectives, financial situation and particular needs
