Concern Over Bumi’s ‘Eroding’ Earnings as high interest expenses and weak coal prices are likely to affect the profits going forward at Indonesia’s largest coal company by output

Concern Over Bumi’s ‘Eroding’ Earnings

By Muhammad Al Azhari on 9:12 pm November 5, 2013.
The financial performance of Bumi Resources, Indonesia’s largest coal company by output, remains worrisome as high interest expenses and weak coal prices are likely to affect the company’s profits going forward, analysts say. In the first nine months of this year, Bumi — controlled by London-listed joint venture of Bumi Plc — saw its net loss reduced by 40 percent year-on-year to $377 billion.Dileep Srivastava, a director and corporate secretary at the Jakarta-based Bumi said the company booked a “significant” $303 million reduction in derivative loss in the period. Bumi’s derivative loss declined to $119 million from $422 million.

Meanwhile, its foreign exchange losses also reduced by $129 million to $119 million while its net interest and finance charges declined slightly by 3.4 percent to $399 million.

Bumi Resources is currently focusing on accelerating repaying its remaining $1.3 billion principal debt into shares in its subsidiaries, Bumi Resources Minerals, Kaltim Prima Coal, Indocoal Resources and Indocoal Kaltim Resources.

Srivastava said the debt for equity swap asset is expected to take place by the end of this year.

“The objective is to reduce interest costs in the 2014 fiscal year,” he said in an email to the Jakarta Globe on Friday.

Bumi coal sales and production volumes actually rose 23 percent and 18.8 percent to 58.6 million tons and 60.8 million tons respectively. But the average selling price of its coal declined by 21.9 percent to $66.8 per ton.

Dileep confirmed that there was no change to its original sales guidance of 74 million tons in 2013. That compares with 68 million tons last year.

Analysts, however, were not convinced that the figures were as promising.

“As Bumi’s interest expenses continue to outnumber its operating profit, Bumi repeatedly booked net losses,” said Jennifer Frederika Yapply, a stock analyst with Bahana Securities.

“While CIC debts will be swapped with Bumi’s assets, we have our concern on Bumi’s financial performance going forward, as the swap will erode Bumi’s earnings. Albeit the swap deal, Bumi has other debts that need to be repaid, especially the short-term ones,” she said.

“We reiterate our reduce call on Bumi, with a target price of Rp 350,” Jennifer said. “Lower interest expenses, less debt and improving coal prices will be the risks to our call,” she said.

Samuel Sekuritas Indonesia stock analyst Yualdo Yudoprawiro said: “Even though Bumi has signed a deal with CIC to swap the $1.3 billion debt with a 42 percent stake in Bumi Resources Minerals and 19 percent in Kaltim Prima Coal, the transaction is not finalized, as it awaits regulatory approval.”

“Looking at this condition, we are estimating that the transaction can potentially be realized next year and we saw that interest expense [of Bumi] will hover at around $600 million this year,” he said.

Yualdo said his firm did not change its price target for Bumi, at Rp 450 and that a hold recommendation will be maintained.

In related news, Bloomberg reported on Tuesday that parent company Bumi Plc was seeking to complete a planned $501 million separation from founding investor, the Bakrie Group by the end of this year.