Summary and recommendation
BUMA is Indonesia's second-largest mining contractor, with a 20% market share. In 2017, Berau Coal, Geo Energy, Adaro and Kideco accounted for 92% of its total revenues. With 70% of its revenues tied to prevailing coal price, near term earnings growth should be supported with Newcastle prices remaining high at $114/ton and Qinhuangdao at RMB686/ton as of 19 Jun 2018. Although coal prices could normalize at lower levels, these should stabilize within the $75/ton to $85/ton range, which corresponds to the RMB500/ton to RMB570/ton green zone range set by the Chinese authorities.
Currently, BUMA is 100% owned by Delta which is in turn 38.1% owned by NTP. NTP is controlled by a consortium of shareholders comprising of affiliates of Northstar Equity Partners, TPG Capital, GIC and CIC. A change of control is defined as 1) Delta holds less than 100% of the voting stock of BUMA or 2) any person, other than Northstar Equity Partners, TPG, GIC and CIC or their affiliates, becomes the beneficial owner of a larger percentage of the voting stock of Delta and ≥ 35% of the voting stock of Delta.
Recent new contract wins and extension should support future revenue and EBITDA generation, as well as reduce exposure to Berau. Since the start of the year, BUMA has secured a total of $2.0b worth of contracts in 2018, bringing its total order book to $7.0b, or 9.2x of 2017 revenues. Although these could lead to higher capex and potentially higher debt temporarily, the resultant increase in earnings base should keep BUMA’s credit profile in check.
Recently, media articles reported the potential shareholder exit from Delta Dunia (Delta) by Northstar Tambang Persada Ltd (NTP). While it is difficult to predict the outcome, investors can put back the bonds at 101 (higher than current indicative offer price), upon a change of control and ratings downgrade, if they are not comfortable with the new shareholders.
We are upgrading our recommendation of DOIDIJ 2022 (Ba3/BB-) to Strong Buy. The recent sell-off has created opportunities for a better entry point. At an indicative offer price of 98.5 / YTM 8.2%, DOIDIJ 2022 is down almost 10 points from its peak cash price at 108 in Jan 2018 and currently offers 120bp pick up over INDYIJ 2022 [Ba3/B+(pos); 99.5 / YTM 7.0%], which we see as adequate to compensate for the potential change in shareholders and customer concentration risk. While we recognize the Indonesian high yield sector could continue to be dragged down by the general soft EM sentiment and IDR weakness and it is tough to call the bottom of the indiscriminate sell-off in the Indonesian complex, we would also like to highlight that BUMA’s near term earnings profile remains well supported by still strong coal prices and commodity credits such as BUMA are naturally FX hedged.