We came away from the meeting reassured that the planned EGM, slated for June 24, is unlikely to be postponed again.
After repeatedly circumventing queries from analysts, Bumi’s management gingerly put the odds at 95% that the EGM would proceed as scheduled.
The key risk, in our opinion is that the potential investor for the non pre-emptive share could ask for postponement as the current share price is 27% below the minimum price set by exchange regulations. We estimate the minimum price for the non pre-emptive issuance at Rp2,350/share.
We think the possibility will ultimately depend on 1) who the potential investor would be and 2) how Bumi’s share price performs in the next couple of weeks. If the investor turns out to be CIC, as we surmise, then the risk of another delay is not as high as in the case if another investor comes in. This is because CIC might be more willing to take a longer-term view, which justifies the high premium it pays to the current share price as Bumi’s coal reserves alone (at Rp2,350/share) is valued at less than US$2/t. However, we think the temptation and/or pressures to postpone the schedule for the potential investor could well outweigh this consideration, especially if Bumi’s share price substantially weakens further.
In any case, the date to watch for is June 9, when Bumi is expected to make additional information if the non pre-emptive issuance would proceed as scheduled and possibility that the identity of the potential investor might be revealed.
Bumi Resources (BUMI.JK; Rp1,710)
Company description
Bumi is controlled by the Bakrie family and has grown aggressively through acquisitions since 2002, now owning substantially all (65% and 70% respectively) of Kaltim Prima Coal and Arutmin Coal. Arutmin operates a 30k ha concession in South Kalimantan with coal production totaling 16.8m tons (75% for export). Kaltim Prima Coal operates a 90k ha site in East Kalimantan with coal production of 28m tons (95% for export). Combining KPC and Arutmin, Bumi is the third-largest thermal coal exporter in the world.
Investment strategy
We have a Buy/High Risk rating on Bumi. The share price has been hit by issues surrounding the Bakrie group's (BNBR had held 35% of Bumi) de-leveraging. However, the Bakrie group managed to settle its debts and the share prices of its affiliates have rebounded well off their lows. We believe the risk of share overhang has greatly diminished. As Indonesia's largest coal-miner, Bumi will continue to benefit from growing domestic and regional coal demand - Bumi is the largest exporter to the Asian region. The Asian coal theme has been and remains extremely potent, and has been the driver behind Bumi's share price performance over the past years. As such, Bumi's large exposure to the export market should mean that the company would see its earnings most leveraged to the price upcycle.
Valuation
Our target price for Bumi of Rp3,300 is set at 2.7x 2011E EV/EBITDA. This is based on a 55% discount to the valuation benchmark for Bumi's domestic peers (ie, a 2011E EV/EBITDA of 6.0x, derived by applying a 15% discount to the 2011E EV/EBITDA average for global coal stocks). We have opted to use EV/EBITDA as our valuation metric to avoid distortions caused by differences in tax rates between Indonesian companies and their regional peers. We apply the 55% discount for Bumi to reflect the company's higher risk profile and high gearing. At our target
price, Bumi would trade on 2010 P/E and 2011 P/E of 12.9x and 8.7x, respectively.
Risks
We rate Bumi Resources High Risk, rather than assign the Speculative flag suggested by our volatility-based quants risk rating system, as we believe the risks from the repo overhang and BNBR's financial predicament have largely diminished.
Risks that could hamper the share price from reaching our target price include:
1) lower coal price and production realization
2) further aggressive gearing up that could substantially raise Bumi's risk profile
3) corporate actions that could be perceived as detrimental to minority shareholders' interests.
After repeatedly circumventing queries from analysts, Bumi’s management gingerly put the odds at 95% that the EGM would proceed as scheduled.
The key risk, in our opinion is that the potential investor for the non pre-emptive share could ask for postponement as the current share price is 27% below the minimum price set by exchange regulations. We estimate the minimum price for the non pre-emptive issuance at Rp2,350/share.
We think the possibility will ultimately depend on 1) who the potential investor would be and 2) how Bumi’s share price performs in the next couple of weeks. If the investor turns out to be CIC, as we surmise, then the risk of another delay is not as high as in the case if another investor comes in. This is because CIC might be more willing to take a longer-term view, which justifies the high premium it pays to the current share price as Bumi’s coal reserves alone (at Rp2,350/share) is valued at less than US$2/t. However, we think the temptation and/or pressures to postpone the schedule for the potential investor could well outweigh this consideration, especially if Bumi’s share price substantially weakens further.
In any case, the date to watch for is June 9, when Bumi is expected to make additional information if the non pre-emptive issuance would proceed as scheduled and possibility that the identity of the potential investor might be revealed.
Bumi Resources (BUMI.JK; Rp1,710)
Company description
Bumi is controlled by the Bakrie family and has grown aggressively through acquisitions since 2002, now owning substantially all (65% and 70% respectively) of Kaltim Prima Coal and Arutmin Coal. Arutmin operates a 30k ha concession in South Kalimantan with coal production totaling 16.8m tons (75% for export). Kaltim Prima Coal operates a 90k ha site in East Kalimantan with coal production of 28m tons (95% for export). Combining KPC and Arutmin, Bumi is the third-largest thermal coal exporter in the world.
Investment strategy
We have a Buy/High Risk rating on Bumi. The share price has been hit by issues surrounding the Bakrie group's (BNBR had held 35% of Bumi) de-leveraging. However, the Bakrie group managed to settle its debts and the share prices of its affiliates have rebounded well off their lows. We believe the risk of share overhang has greatly diminished. As Indonesia's largest coal-miner, Bumi will continue to benefit from growing domestic and regional coal demand - Bumi is the largest exporter to the Asian region. The Asian coal theme has been and remains extremely potent, and has been the driver behind Bumi's share price performance over the past years. As such, Bumi's large exposure to the export market should mean that the company would see its earnings most leveraged to the price upcycle.
Valuation
Our target price for Bumi of Rp3,300 is set at 2.7x 2011E EV/EBITDA. This is based on a 55% discount to the valuation benchmark for Bumi's domestic peers (ie, a 2011E EV/EBITDA of 6.0x, derived by applying a 15% discount to the 2011E EV/EBITDA average for global coal stocks). We have opted to use EV/EBITDA as our valuation metric to avoid distortions caused by differences in tax rates between Indonesian companies and their regional peers. We apply the 55% discount for Bumi to reflect the company's higher risk profile and high gearing. At our target
price, Bumi would trade on 2010 P/E and 2011 P/E of 12.9x and 8.7x, respectively.
Risks
We rate Bumi Resources High Risk, rather than assign the Speculative flag suggested by our volatility-based quants risk rating system, as we believe the risks from the repo overhang and BNBR's financial predicament have largely diminished.
Risks that could hamper the share price from reaching our target price include:
1) lower coal price and production realization
2) further aggressive gearing up that could substantially raise Bumi's risk profile
3) corporate actions that could be perceived as detrimental to minority shareholders' interests.
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