Danareksa UNTR Beating the street

2008 earnings are 17% above our expectations due to the weaker rupiah

Despite the 20% qoq drop in 4Q08 earnings, UNTR’s earnings for the full year are 17% above our expectations. This is because of the weaker rupiah, which was able to lift the heavy equipment gross margin to 23.5% for the full year (or better than our expectation of 20.6%) despite the 60.8% qoq drop in Komatsu’s 4Q08 sales volume. Also giving a boost to the revenues was DEJ. It was able to maintain its high coal average selling prices (the 4Q08 implied ASP only dropped 5.3% qoq to $133/ton).

DEJ’s 4Q08 negative gross margin is misleading
DEJ has booked a negative gross margin in 4Q08 of -35.6%. However, we believe this stems from accounting treatment issues and does not reflect corporate governance problems. This is indicated by: 1) the highly volatile quarterly gross margins and (2) the high implied 2008 cost of DEJ’s coal of $94.6/ton. The company explained that cost allocation was a difficult matter since even though DEJ is a subsidiary of Pama, it also employs Pama as the contractor, and, at the same time, UNTR’s internal accounting method is different from the auditors. Hence, corrections in the fourth quarter are expected. As such, we believe that investors should pay more heed to the more stable consolidated gross margins of Pama and DEJ.

Cost pressures should ease going forward
UNTR’s mining related subsidiaries (Pama and DEJ) have faced higher cost pressures for two main reasons: (1) DEJ’s higher extracting costs following the increase in the stripping ratio to 11x and (2) higher fuel, repair & maintenance, and subcontracting costs for Pama. Nonetheless, we believe that cost pressures will ease going forward because: fuel prices have fallen substantially; Pama’s fuel usage ratio is declining; and because Pama should be less reliant on subcontractors as its capacity is expanding.

Maintain BUY, TP of Rp6,100
We like UNTR because of its strong business model. There is also the possibility of a positive earnings surprise given that the rupiah may weaken further relative to the US dollar. UNTR is our preferred stock in the sector as it has a more attractive valuation than HEXA as well as better share liquidity. UNTR’s shares trade at PE 09-10F of 6.9-6.6x and offer a ROE of 21.3%-19.3%. Our TP of Rp6,100 implies PE09-10F of 7.9x-7.5x. BUY recommendation maintained.