In one
session of value investing training some time ago, a participant asked, ‘Mr.
Teguh, what is your opinion about Bumi Resources (BUMI)? I read your article
about the
company’s management attempt to restructure their debts. If the attempt was a
success, the
stock will
rise, no?’
And I replied, ‘Whether BUMI would
successful or not in restructuring its debts, or whether
the
company’s financial performance will improved in the future, that only time will tell. But one thing for sure, the
decision to buy BUMI at the price of Rp50 per share clearly offers a very different risk (and also different potential gain) than if we buy the stock at Rp1,000 per share. I'm not
interested when BUMI was still trading at
Rp1,000’s per share, but
what if we
can buy it at 50
only?
BUMI has
just reported its financial performance for the first semester of 2016,
which shows no
significant improvement: The revenue fell
from US$ 21 to 12 million, and the company still reported losses of US$ 11.8
million. BUMI’ equity
is still minus aka capital deficiency of US$ 2.8 billion, and the company has
long-term debts which maturing within the next year amounting to US$ 3.6
billion, which, if the management does not manage to pay it off, postpone the
payments, or convert the debts into shares, then BUMI will certainly be
bankrupt. From
this point of view, BUMI is still a company with the worst of the worst
performance in the Indonesia Stock Exchange. Actually, the company is dying.
However,
from the operational side, the year of 2015 might already be the lowest point
for the company, as since January 2016 until today, the situation of coal
business have
been a little better. Okay, let's see. In 2015, BUMI sold 79.3 million tons
of coal, down 6.4% compared to 2014, while the selling price of coal was also
only US$ 45 per ton, plummeted compared to US$ 53 per ton in 2014. However, BUMI,
like most of other coal companies, during 2015 was able to reduce its operating
costs for coal production (excluding financial costs such as debt interest), of
which cash cost fell to US$ 30 for every ton of coal mined, from previously US$ 35.
While in
the first half 2016, BUMI sold 41.9 million tons of coal, increased 5.1% over the same period in 2015, and
its cash cost dropped further to US$ 27. And while the selling price of BUMI’ coal still fell to US$ 40 per
ton, but that's because the benchmark price of coal at Newcastle Australia was at its lowest
points during the period. From January to June 2016, the prices of
Newcastle’ coal were only US$ 53 –
57, compared to the same period in 2015 which were US$ 63 – 67 per
ton (Note:
the prices of Indonesian coal, in this case thermal coal including those of
BUMI’, are almost always lower than the price of Australian coal because of
lower quality. But everytime the price of Australian coal goes up or down, the
price of Indonesian coal would follow).
The good
news, lately the
Newcastle coal prices start rising.. that when this article was written, it is already US$ 78
per ton! So BUMI, as well as any other coal companies, sure will enjoy an increase in revenue
throughout the second half of 2016 (assuming that they not limit their productions), and
operating income will be
greater than 2014 and 2015, given the costs of coal production are now much
cheaper than years ago.
 |
| The benchmark of coal prices in last six months, so far has risen almost 40% |
However,
no matter how good BUMI’ performance from the operational side, but as long as
the company can not deal with its debt problems, the company will still suffer
huge losses. So it is important to look at the development of
the debt restructuring
proposed
by the company (to its lenders). In above already mentioned that if BUMI’
management did not managed to pay
off its debts, filed delays of payment, or convert the debts into shares, then the company can be certain
to be insolvent. And because the option to pay off the debt is impossible,
the
management could only propose for delays of
payment or conversion of debt into shares, aka restructuring. Since last year, BUMI’ management has submitted a proposal to its creditors which offers to convert the debts
totaling US$ 2.8 billion into shares of BUMI, and shares in BUMI’ subsidiaries, while the remaining debts of US$ 1.2
billion (BUMI had debts of
approximately US$ 4 billion), its maturity is extended to five years, and as compensation, the
company will add more collateral. You can read a more
detailed information
in here.
BUMI will
convert its debt in the near future?
Now,
after over a year, how it goes? Here we go. On October 27, the management of BUMI will
attend the
trial of PKPU (Penundaan Kewajiban Pembayaran
Utang, aka Suspension of Payment) related to its debt amounting to Rp28.5 trillion, of which
there are only two possibilities: 1. BUMI will be bankrupted, or 2. The debt
converted into shares, at least some of them. If BUMI goes bankrupt,
it means the end,
and Bakrie Group
must get out of the company, which is unlikely given the reputation of
the Bakrie Group that has always escaped bankruptcy (yes, they even survived the crisis of 1998 and 2008), and because the coal
prices
(finally) started to rise.
Meanwhile,
if the creditors
agree to convert their credit into shares, then BUMI will issue new shares
(right issue) for those creditors, and the exercise price of the right issue is
based on the average price in the market
during the 25 trading days preceding the effective date of the right issue itself. Well,
here it comes
the fun part: We know that the average market price for BUMI in last month is around Rp70 –
80
per share. If the exercise price of the right
issue is settled
at Rp70 – 80, then
the company must
issue lots
of new shares, ie up to hundreds of billion shares because the value of the right issue will also
very large, ie up to
Rp28.5 trillion (about US$ 2.5 billion). And if BUMI do have to issue that much of new shares, then the
ownership of Bakrie Group on BUMI would be diluted to the extent that they will
become minority shareholders and lost control of the company, and Mr. Aburizal Bakrie
obviously does not want
that to happen.
So what is the
solution? Well,
the share price of BUMI in the market should be pulled up to
a certain level, so that the exercise price of the right issue will not set
at the level of Rp70 – 80 per
share but higher than that, so the company will only need to issue new shares in a lesser number, and
Bakrie will remain the majority stakeholder in BUMI! So maybe that’s why BUMI started to skyrocketted in the past two
days. But unlike previous rallies, this time the increase in share price has a
strong analytical basis. Should the management of BUMI later received approval to convert the
company's debt into shares, the rally will continue.
Okay Sir, so are you
saying that the stock is worth to buy? Well, I told you one year ago that BUMI is
indeed interesting at the price of Rp50 per share! Sadly
almost nobody listening. But once again, it must be remembered that the company's performance is
still a mess, and even if the management is successfully convert the company’s debt into shares, it is
not a guarantee that BUMI will return to make a profit in the future,
so the decision to buy the stock at this moment is still closer to speculation rather than
investment. If you want to play safe, then you should wait for some of the
following: 1. BUMI actually received approval
to convert its debt, after the trial meeting on October, 27, 2. BUMI reported a
positive equity value, aka no
longer the capital deficiency, for obtaining additional capital from its rights
issue plus the reduced value of the debt, and 3. The company posted a net
income, maybe next year or the year after (2017 or 2018) assuming the rise in
coal prices continues or at least not falling back.
But one thing: When the
three points above eventually happen, it is almost certain that the stock would
already rose high, can be much higher than its current price. So if you dare to
take risks, well, here you go your 'stock a million people', just take it now
or never!
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