January 26, 2009

Putting Indonesian Governance to the Test
Eric Ellis, Jakarta

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