Tuesday, January 27, 2009, online.barrons.com, Putting Indonesian Governance
to the Test,
By Eric Elis, a foreign correspondent based in Southeast Asia
Credibility problems undercut seeming bargain stock.
WHERE ON EARTH CAN YOU FIND A 500% RETURN THESE DAYS?
Here's one that its sponsors claim is guaranteed.Sure seems like a lay-up. It
involves
a single trade in the shares of a big natural-resources company located
in one of the world's most populous countries. It also carries the
backing of no less than a cabinet minister.
So how come this opportunity has been staring investors in the face since
November without enticing much buying?
The catch is that the country is
Indonesia, perhaps best known to Americans for the dubious record set
by its former president Suharto, whom the World Bank said improperly
amassed one of recent history's biggest fortunes, some $30-35 billion.
Suharto died last January, after
being ousted a decade earlier, and Indonesia has turned itself into a
robust democracy, albeit still ranked by graft watchdog Transparency
International as one of the world's most corrupt countries. This
opportunity thus is more a litmus test of Indonesian corporate
governance than a potential investor windfall.
The company is Bumi Resources (ticker: BUMI.Indonesia), one of the
world's biggest coal miners. Caught in the downdraft of commodity
prices this year, its shares have fallen by 95% since July, and now
trade around 470 rupiah (about four cents US). The price doesn't seem
to reflect the company's value: It's the world's biggest exporter of
steaming coal -- the type used by utilities to generate electricity --
and it expects to post 10% higher revenues and production volume for
the nine months ended Sept. 30, 2008, as sales grew by 33% to $2.4
billion in that period. Consensus estimates for earnings are 372 rupiah
(about three and a third cents) a share for full-year 2008 and 327
(slightly less than three cents) a share for 2009, according to Thomson
Reuters. That gives it an anemic multiple of 1.4 times earnings,
compared to the Jakarta Stock Exchange's mining sector average of 20.23
last year.
BUMI is controlled by the country's
powerful political-business clan, the Bakrie family, who run various
entities as part of the Bakrie Group. The family patriarch is Aburizal
Bakrie, one of Indonesia's richest men. Forbes magazine estimated his
2007 fortune at $5.4 billion, but after the collapse in Bumi shares, it
has dwindled to $850 million.
Sixty-two year-old Aburizal is also
one of Indonesia's most influential politicians. He became economics
minister in 2004 after he backed president and former general Susilo
Bambang Yudhoyono's candidacy in Indonesia's first democratic
presidential election. He has since been named Minister for People's
Welfare.
In an interview with Barron's,
the likeable Bakrie claimed he hadn't transacted business in his four
years as a cabinet minister, ceding control to his younger brothers.
"I am no longer a businessman,"
Bakrie says. "I know what [my family] is doing, but I'm not a
businessman at all. I go to the company office to pray...and if in the
evening my brothers would like to report, yes, we discuss, that's all."
Indonesians don't buy the explanation.
Twice-shy after the Bakrie empire
collapsed in Asia's 1990s' financial crisis, BUMI's foreign bankers
tied their loan commitments to the value of its shares. Western lenders
fled once the global financial crisis arrived. Bumi has $1.2 billion in
borrowings due to mature shortly and has been trying to refinance them.
It recently entered two debt-to-equity conversion deals which, if they
close, will dilute the Bakrie family's grip on BUMI.
BUMI executives have tried to put a
floor on the slumping stock -- here's where the highly speculative
trade opportunity comes in. On Nov. 13, BUMI announced an $800
million-share buyback, citing a price of 2,500 rupiah for each BUMI
share. That's around 432% higher than BUMI's current price. BUMI's
12-month high was 8750 on June 10, and its low was 385 on January 16
this year. The buyback will occur in about two weeks.
Bumi director Dileep Srivastava says
it's on track: "We'll buy on the traded market at the best price we
can." So why the yawning gap between buyback price and recent price?
Put simply, few Indonesian investors believe it will happen.
Goldman Sachs' Chee Yoke Fong says in
a note to clients: "While the [debt-equity conversion] deal has
provided Bakrie a lifeline in the restructuring of its debt, we think
its complexity and opaqueness fail to remove the existing overhang on BUMI."
Transactions involving related parties within Indonesian
companies have at times been used to bail out specific units, to the
dismay of shareholders.
And James Bryson, managing director
of Jakarta investment house HB Capital, says he will be "very
surprised" if either the debt-equity deals or buyback occurs.
The buyback is supposed to occur February 13. By the way, that's a Friday.
