Share tips: A play on Indonesia’s commodity boom

By Paul Hill Feb 10, 2012

Paul Hill

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Indonesia’s economy is booming, inflation is under control and sovereign debt levels (25% of GDP) are low. The country is rich in commodities, particularly in thermal coal (exports account for 37% of global sea freight).

This is good news for Bumi, a UK holding firm that owns a 29.2% stake in PT Bumi Resources and a controlling interest (84.7%) in PT Berau Coal Energy. Both are low-cost, open-cast miners, quoted on the Jakarta stock exchange.

Together they have reserves of 3.2bn tons of thermal coal in Indonesia. Its output of 86m tons a year makes the group the world’s fifth-largest player. It plans to ramp this production up to 140m tons by 2015, taking advantage of its geographical access to the Indian and Chinese markets.

The International Energy Agency notes demand is set to surge in Asia, where new coal-fired power stations are being built in light of the Fukushima nuclear accident in Japan. Meanwhile, supply capacity is being constrained by delays in building new port and rail infrastructure in Australia and South Africa, which has hampered exports.

I value Bumi on a forward price/earnings (p/e) ratio of 14. Assuming 2012 underlying earnings of about 75p a share generates an intrinsic worth of £10.50 a share. In November, founder and co-chairman Nat Rothschild spent £1m buying 110,000 shares at 911p each.

BUMI (LSE: BUMI), rated a BUY by Religare Capital

Bumi share price 

The company’s board acknowledges that the present corporate structure needs to be simplified. Debt needs reducing and interest cover needs to be raised above today’s 2.5 times. There is also a proposal tabled by the Bakrie family and their partners (who together own a 29.9% stake) to oust Rothschild and other members of the board.

However, Bumi possesses first-class assets, and is ideally placed to benefit from Indonesia’s renaissance and the tight global thermal coal markets. Preliminary results are scheduled for 29 March. Religare Capital has a target of £11.50.

Rating: BUY at 790p 

• For information on Paul’s weekly share-tipping newsletter, see www.moneyweek.com/PGI or call 020-7633 3634.

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