JP Morgan: Bumi Resources Below Expectation

1H10 results below expectation: BUMI reported 1H10 net income of US$135MM, down 30% Y/Y. As its historical net income has been very volatile, a comparison with historical operating profit is probably a more stable and accurate measure. 1H10 operating profit of US$532MM was below both J.P. Morgan’s (40.1%) and consensus’ (45.9%) full-year operating profit forecasts of US$1,327MM and US$1,158MM, respectively. (Note: Historically, 1H operating profit has contributed to an average of 53.6% of the full-year profit).

2Q10 was strong on an absolute basis: Subtracting 1Q10 results, 2Q10 operating profit of US$313MM was up by 41.5% Y/Y and 43.1% Q/Q. Excluding non-recurring items and forex gain (loss), 2Q10 core income rose by 65.2% Y/Y and 105.4% Q/Q. Much of the growth in profit was derived from a margin expansion at the gross profit level, likely due to high ASP. Despite the lower-than-expected results, 2Q10 was strong on
an absolute basis as evidenced by the strong Y/Y and Q/Q growth.

Downside risks to our FY10E earnings forecast: With these, we view that there is a downside risk to both our and consensus FY10E earnings forecasts. Meanwhile, we expect the share price to trade lower due to the lower-than-expected 1H10 results.

• We maintain our OW rating and PT of Rp3,400: We are still waiting for detailed financials. Meanwhile, we maintain our Overweight rating and Dec-10 SOTP-based PT of Rp3,400. Our SOTP method is a sum of the DCF values of each mine. The DCF method is derived using a riskfree rate of 10.0%, equity risk premium of 5.5% and terminal growth rate of 5.5%. We incorporate a value of US$10 cents/ton to BUMI's resources. Finally, we incorporate Rp359 per share of potential tax penalty and apply 15% discount to NAV to derive our PT.