Research Today: Bumi Resources (Bumi IJ), Pulling all levers – BUY – Tp4,000 by Jayden Vantarakis Best coal asset by far at the cheapest valuation. Catalyst for re-rating will be deleveraging balance sheet. Mgmt confirmed last week that deleveraging its their number 1 priority. Regardless of CIC deal or not, repayment of the first US$600m tranche this October is on track with internal cash flow. Market seem to be disappointed with swapping 75% of BRMS with US$2.07b vallar convertible note without further clarity in plans. However, we feel that this lays the path to further pay down CIC debt. Herald resources will be an extremely attractive asset (highest concentration zinc and lead deposit) for the Chinese to participate in. Furthermore, CB puts a real value to BRMS where it currently does not reflect full value in Bumi’s share price. Jayden Vantarakis re-iterates buy call based on earnings upside as debt is repaid. Debt plans outlaid At an analyst briefing last week Bumi confirmed it is negotiating with CIC to retire the full US$1.9b debt this year in exchange for the convertible notes, enabling CIC to become a shareholder in Vallar. If talks are not successful, Bumi will sell down the convertible note in stages as the debt tranches fall due. Regardless, repayment of the first US$600m tranche this October is on track as the company has access to US$787m in liquidity as of June. On track for 66mt production this year BUMI produced 14mt during 1Q11 and is on track to produce 30mt for 1H11. This will be in line with prior years where 44% of annual production is realized in the first half. We keep our 2011CL assumptions unchanged with 66mt and ASP US$91/t. The 32mt KPC conveyer belt is on track to be completed by 1H12, potentially as early as 1Q12. This will double production capacity to 64mt. Accounting changes to gain Vallar FTSE 100 listing In order for Vallar to obtain entry to the FTSE 100, the company’s accounts must be adjusted in line with international peers. The key change for Bumi is the recognition of its share of KPC and Arutmin at the top line. This has minimal impact on future earnings forecasts for the company. Stock is cheap compared to peers Assuming full repayment, Bumi will save $361m in annual interest costs, implying US$1.1bn in earnings for 2012 and 7x P/E. Based on the long run average of 15x earnings multiple, a bluesky fair value then would be 6,350 per share. Our 2012CL earnings forecast and Rp4,000 target price only incorporates repayment of the first tranche of US$600m to CIC this October. The stock is currently the cheapest Indonesian coal play offering 28% upside. Strong BUY. Note: Despite recent sell off in commodities. Aussie coal price climbs as rains cut production.Australia’s thermal coal prices rose by more than US$2/ton WOW to tip past US$121 per ton, as heavy rains in the Hunter Valley region slowed output. COMMENT: China has commenced restocking ahead of peak power demand during the 3rd quarter, however inventory levels are up month on month meaning a near term pause. We met Chinese coal traders in town telling us they need restock big-time in the 2HAny Australian spot price increase against this backdrop is positive and will flow through to Indonesian thermal coal indices. The 2 most leveraged stocks to index linked pricing are BUMI and HRUM.
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