bumi resources – an sbm trading buy call

We have covered Bumi briefly before when it was trading around the 500p level in April and in which we opined upon the potential for a run towards the 600p mark. Although we caught a small bounce in the stock to the 550p level, as the chart below illustrates, it has been one way traffic in the Indonesian coal minersince this point over the last 12 weeks with a drop to all time lows just recently. In fact, the stock has now shed a tub thumping 74% of its value during the last 12 months. 

Bumi – Weekly 1 year chart

The chart does however show tantalising signs of a slowing in its descent, and perhaps, an imminent reversal of the downtrend with the stock essentially displaying a flat-lining pattern over the last 8 weeks. If we look closely at the 3 monthly chart above, and particularly those areas where I have highlighted in red, you will see that there is evidence of accumulation by strong hands – essentially on those days when volume pops up, the price spikes. In recent weeks there has not be a material amount of shares traded and I get the impression another show of strength by the buyers and we’ll be closer to 400p than 200p, particularly as the stock is relatively illiquid and prone to sharp moves.

Bumi weekly chart

The weekly chart similarly displays classic bottoming characteristics with the RSI in extreme oversold territory and beginning to turn up and the MACD line looking like a cross over is immiment – both positive signals for a sharp and meaningful corrective bounce to the upside.

I believe that the Board of Directors are currently in a restricted period and so cannot deal in the shares at present. Given that Nat Rothschild pumped a shade over £3m into the stock at just over £6 a share in early April, I would not be surprised to see a slew of Directors buying when the restricted period ends given the further sharp falls since this point. One issue that has hit the stock and added to continuing concerns over Corporate Governance, is the delayed payment of some $231m to its 29.2% subsidiary company by PT Recapital Asset Mgmnt. Although not an insignificant sum, and noting the wording that it will be repaid, this adds to questions as to just how the company is being run by the Indonesians.

Excluding the write down of $286m, Bumi would have made $171m in pre trax profits during 2011 (around £111m). For a company with a market cap of £550m this seems mean to us.

Coal prices have also been on a downward trend due to the economic slowdowns in the big coal consumer countries China and India. Despite the decline however, BUMI reported a higher average selling price in the Q1 of the year, thanks to its long term contracts. The company’s coal sales increased by 14% to 15.9 million tonnes in the Q1 of the year compared to 13.9 million tonnes in the same period last year. The Average Selling Price was USD 92.80 per tonne in the Q1 this year up from USD 87.70 YoY too.

We call at Trading Buy on Bumi at 305p.