Stocks to focus on – United Tractors & Adaro Energy.
Why United Tractors?
On recent company visit Albert Saputro/Adam Worthington learn that United Tractors(UNTR) will likely beat Macquarie’s 2008 EBITDA forecast by some margin. MacQ 2008 EBITDA forecast stands 4% above consensus. The company will likely beat 2008 consensus at the net profit line as well, despite intention to record an inventory write-down in 4Q08. Albert/Adam think the surprise is coming from: (1) retroactive price increase in mining contracting, (2) better mix on heavy equipment sales.
Looking forward into 2009, the meeting also reveals the scope for an upside surprise to Macquarie’s estimate, where Albert/Adam are already above consensus by 17% on EBITDA and by 22% on EPS. One reason is the carry-forward surprise on mining contracting fee and revenue. The other reason is heavy equipment sales mix. It appears that when the Street analysts brought down unit sales forecast for 2009, they all assume the sales mix between the smaller and bigger units will remain constant. The fact is, based on United Tractor’s pre-order log, the company will sell significantly bigger proportion of big equipment that costs up to 3x the smaller ones.
Why Adaro?
I believe institutional investors are underweight Indo coal space at the moment given the fall-out on Bumi Res. Adaro’s IPO in July 2008 was taken-up mostly by retail investors, as allocation to institutional investors was tightly limited. Quitely, Adaro has crept up to become the #9 biggest stock in the ISX index (and #1 biggest coal stock) with 2.5% weight. Coal sector accounts for roughly 10% of the ISX index, while broader commodities about 20%. For index trackers, the risk now is being too short of coal and commodities when global de-stocking cycle is coming to an end. Adam’s cautious approach on corporate governance is appropriate and natural given the scar from the Bakrie group. But I think the Astra group founders are no Bakrie.
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