BUMI - Balance sheet to remain in focus, cut to U-PF with TP Rp2,200

Note out this morning on Bumi Resources. Key points:

* Downgrading to Underperform with target price Rp2,200/sh
* Deleveraging not playing out as previously expected
* CIC debt now being refinanced as opposed to repaid. This was the key plank of our investment thesis.
* Buyers for the US$2b convertible bond look less likely given current volatile market and high conversion premium
* Operations performing well but focus will continue to be on balance sheet and cashflow
* Bumi is a highly geared, high beta stock with lower earnings visibility than peers. We expect it to be less favoured in the currentmarket.

Link to note here http://www.clsa.com/evoucher/reports/487624827.pdf


Whilst Bumi Resources had a solid 1H11 result, operational performance will continue to take a back seat to the balance sheet. We revise our assumption on repayment of the first tranche of CIC debt to refinancing as cashflow generation fails to keep pace with interest and finance charges. Our target price is lowered to RP2,200 reflecting a discount to regional 12CL PE and EV/Ebitda multiples on higher leverage. Downgrade to Underperform.

Deleveraging slower than expected

Negotiations are ongoing for a deal with major lender CIC to swap the US$2.07b convertible bond for its US$1.9b debt facility. However our new base case factors in calling a US$236m investment with an affiliate and refinancing to make up the difference. The proposed purchase of treasury stock to cover redemptions of a convertible note and cash outflow for dividend to shareholders of US$93m also means deleveraging will be slower.

When gearing is high it's all about cash

During 2011 year to date the cash required to service Bumi's existing debt has outstripped the after tax net cash it's generated from its coal mines. Our forecast for cash generation in 12CL and 13CL, whilst net positive, is not sufficient to pay down the second two tranches of the CIC debt. This means further repayments will rely on refinancing should
purchasers for the US$2.07b convertible note not be forthcoming.

Operational performance strong but taking a back seat

Operationally Bumi had a solid first half putting it on track to produce 66Mt of thermal coal in 11CL on a 100% basis from KPC and Arutmin. Management is also affirming the 32Mt overland conveyer project at KPC is on track for completion in 1H12 which will allow the group to realize our 75Mt 12CL production target. Whilst these are positives, we expect the market to continue its focus on the leveraged balance sheet.

Balance sheet to remain in focus, cut to U-PF with TP Rp2,200

We adjust down our earnings assumptions to reflect higher realized operating costs during 1H11 and higher interest charges in 12CL and 13CL as net gearing remains higher. We base our target price of Rp2,200 on a blend between 9x 12CL PE and 5x 12CL EV/Ebitda. This is at a discount to regional peers to reflect the groups high financial leverage.

Regards,

Jayden Vantarakis
CLSA Indonesia - Investment Analyst
Phone: +62 21 2554 8834
jayden.vantarakis@clsa.com

source: CLSA Indonesia - Investment Analyst