Macquarie United Tractors Expensive given peaking margin

Event

We reiterate our Neutral recommendation on UNTR, but raise our price target to Rp10,300 from Rp9,250. Whilst we like the company, we think the stock appears fully priced on a DCF valuation as well as the benign earnings outlook.

Impact

Volumes robust heading into 2010…given declining interest rates and improving commodities prices. This is reflected in our 20% volume increase in heavy equipment, 15% increase in coal contracting volumes and over 100% increase in coal sales (due to the new mine expansion) in 2010.

...but margins are peaking…We do not see these margins as being sustainable long term given the potential for increasing competition in heavy equipment, the appreciation of the rupiah and coal contracting margins typically peak upon renewal (which occurred late last year).

…leading to a flat earnings profile with the stock appearing fully valued…We forecast a broadly flat earnings profile over the next three years. We think that the stock therefore looks fully valued on 11x in 2010 given its flat earnings profile. Further, it currently trades around our target price.

Election – Upside risk? We note that should SBY have a landslide victory, that this would likely lead to a market re-rating, which could be useful for stock performance.

We like the business model (of being an integrated equipment supplier, coal producer and coal contractor) and management team. Should we see a correction in the share price, this would turn us more positive.

Earnings and target price revision
We slightly downgrade our 2009 earnings forecast by 3% due to lower coal sales volume, but upgrade our 2010 forecast by 8% to reflect higher coal price assumptions and unit sales. We raise our target price to Rp10,300 from Rp9,250.

Price catalyst
12-month price target: Rp10,300 based on a DCF methodology.
Catalyst: Sustainable high margin in heavy equipment and coal contracting business, increasing coal price and coal production.

Action and recommendation
We reiterate our Neutral recommendation on the stock with Rp10,300/sh target price. Whilst we think the company’s volume outlook appears strong, we do not think the current margin levels are sustainable and therefore believe that the risks are in the price.