Key Points
***Outperform. We are initiating coverage of PT Bumi Resources (Bumi) with an
Outperform rating and a year-end 2008 target price of IDR6,464. Despite Bumi's
share price increasing 411.1% year to date, we believe further upside exists
based on our discounted cash flow valuation. By our estimates, the shares have
a further 40.5% upside if they are to reach our target price. On a relative
basis we find Bumi's shares trade at a significant discount to our coverage
universe for P/E, EV/EBITDA, and EV/reserves.
***Large Reserves Base Supports Production Growth. Bumi's gross reserves base
is estimated at 1,950 million tonnes, which provides for a mine life of 21
years based on 2010E gross production levels of 94.0 million tonnes. We
believe the reserves base and more than 6,000 million tonnes of resources
provide the foundation for further production growth beyond the current
expansion phase.
***Leveraged into Regional Prices. 95% of Bumi's coal sales are generated from
exports, which allows the company to be fully leveraged into the highest
thermal coal prices in the region.
***Implementation of Cost-Saving Measures. Due to its high strip ratio, Bumi's
production costs are high, relative to its peers, making it vulnerable to coal
price declines. The company is undertaking several measures to reduce costs by
up to US$1.50/tonne. This, together with coal-bed methane production from its
deeper resources, should cause margins to expand.
***Investment Risks. Risks to our target price and investment outlook include
changes to our coal price and capex assumptions, delays to Bumi's expansion
plans, transportation bottlenecks inhibiting sales, and changes in government
regulations (including resource taxes).
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