Downgrade to Sell on corporate governance concerns We believe the recent corporate actions—a series of expensive acquisitions which do not appear to add much value, costly debt raisings and the lack of transparency around these transactions—imply significant risks that may undermine the company's underlying value, despite the undisputed quality of its core coal assets. Further, as most coal companies are trading at similar valuations to Bumi (2-4x09F PE), the risk is not worth taking; INDY, ITMG and UNTR provide better options for Indonesian coal exposure. Recent expensive transactions BUMI signed a total of US$563m for acquisition of three companies in one week. The expensive price tags (valuations of over 2-3x comparable transactions), and lack of specifics on the assets' potential heighten our concern about the risk of further value-destructive acquisitions. Indeed, the staggered payment structure, requiring actual payment of US$140m in 2009 against the US$620m in funding available currently, means that similar acquisitions in the near term cannot be discounted Reducing earnings forecast We cut our earnings forecasts for Bumi by 34% in 08 and 57% in 09F, reflecting lower volume (52mT in 08 and 56mT in 09F) and lower ASP (US$73/T in 08 and US$67/T in 09F) assumptions, based on the benchmark price of US$81/T in 09F. Cutting 12-month share price target to Rp500 from Rp7,680 We have applied a 55% discount to our life-of-mine DCF-based NPV (WACC: 14.3%) to reflect significant risks related to the company's corporate governance. Our TP implies 1.4x 09F PE and US$1.3 EV/ton. Upside risks: higher-than-expected coal price and volume, and higher-than-expected dividend payment.
