Credit Suisse - Indonesia - United Tractors (UNTR IJ, BUY): A proxy to infrastructure building in Indonesia

United Tractors (UNTR IJ, BUY, 12M TP IDR 13,000)

Strong industry position to benefit from government's infrastructure focus
United Tractors (UT) is an exclusive distributor of Komatsu heavy equipment for use in mining, construction and agribusiness. UT also provides mining contract services to coal mines. We expect that the incumbent president in Indonesia is likely to be re-elected in July 2009 and believe that he would continue his reform agenda in a more ambitious way. UT, being an industry leader with over 40% market share would be one of the beneficiaries of the government's focus on building infrastructure.

Improving earnings outlook justifies re-rating
We forecast a recovery in equipment sales and average selling prices in FY 2010. Our HOLT model derives a revised 12M target price of IDR 13,000 implying a 12M forward P/E of 11.7x. Despite the recent sharp rally, we believe that there is still re-rating potential on improving earnings outlook and with the Indonesian market now trading at a 12M forward P/E of 12x. We also note that UT has a long history of trading at a P/E range of 12x-15x during its growth period. We upgrade UT to a BUY.


Bottoming out of equipment and machinery sales
While heavy equipment sales volume fell by 46% YoY in Q1, this was offset by average selling prices that rose by 70% YoY. This suggests that if we are seeing a recovery in the equipment sales volume in H2 2009, there would be upside to revenues even if average selling prices are to stay flat in H2. We believe that equipment and machinery sales have bottomed out in Q1, as management guided for sales volume to decline by 50% YoY in 2009 and Q1 has already seen a 46% YoY decline. For the coal mining contract business, management is guiding for a 10% YoY increase in Pama coal extraction to 65 m tons in 2009 premised on improvement in stripping ratio. In addition to the machinery sales, UT is gaining a more stable flow of income from the maintenance and service business segment, thanks to the strong machinery sales in the previous years and we expect this recurring revenue to grow 10% for FY 2009.