Mandiri Sekuritas Heavy Equipment: Commodity pick up beneficiary

Commodity pick up beneficiary

We upgraded our view on this sector to overweight due to: 1) healthier result from May09 unit sales, 2) commodity prices trading well above the 8-year average, and 3) leasing rates fall for heavy equipment. United Tractors (UNTR) would be our top pick, thanks to its more stable operating income, bigger market capitalization, and higher amount of share free float. We also lower risk-fr! ee rate a ssumption of 9.5%, resulting in higher target price. We raised the target price of UNTR to Rp13,000/share and maintain buy. As for HEXA, we upped its target price to Rp1,960/share, but downgraded it to Sell recommendation as its current price is already beyond its intrinsic value.

Upgrade to Overweight on positive outlook. During the crisis period of Oct08 to Apr09, monthly heavy equipment sales of UNTR and HEXA dropped from monthly average of 600 units to 250 units (between Jan08-Sep08). However, the 381 unit sales in May09 were positive wind that could indicate that the trend has seen its bottom (exhibit 1). We believe that demand still supports for better heavy equipment sales in FY09F and deem that our FY09F forecast of 2,515 for UNTR and 571 units for HEXA can be comfortably achieved. Commodity prices are still trading above the long-term average (exhibit 2) and leasing rates for heavy equipment have already eased to between 20-21% p.a. for rupiah (versus 24% p.a. during its peak). We remain positive for FY09F heavy equipment sales outlook and thus we upgraded our stance for the sector to overweight from Neutral

United Tractors is our top pick. We chose UNTR, over HEXA, as our sector top pick for its stability in generating operating income, bigger market capitalization, and higher floating rate. UNTR has lower operating income CoV (based on 8-year data) of 72.1% than HEXA of 94.9% CoV. This is due to UNTR’s diversification into mining contracting (contributing 54.0% to operating inco! me), more defensive than selling heavy equipment (exhibit 3). With foreign funds eyeing the emerging market, including Indonesia, UNTR would be more preferred thanks to its bigger market capitalization of Rp36.9tn than HEXA of Rp2.0tn. UNTR’s free-float stock is also bigger, at 40.5% versus HEXA of 25.0%. We forecast ROE09F-10F of UNTR at 25.1%-25.6% (versus 8-average of 26.4%) and HEXA at 30.7%-19.6% (versus 8-year average of 21.1%). Note that UNTR would be a better bet for positive outlook in coal, as it has higher correlation with coal price fluctuation than HEXA.

Raising target prices. We reduced our risk-free rate assumption to 9.5%, resulting in lower WACC and higher valuation. For UNTR, with WACC at 12.4% and TG of 5.0%, we upgraded our target price to Rp13,000/share from Rp12,000/share. This implies PER09F-10F of 13.4x-10.0x and PBV09F-10F of 3.3x-2.6x. We remain a buyer for UNTR. We raised the target price for HEXA as well, to Rp1,960/share from Rp1,450, implying PER09F-10F of 7.3x-9.7x and PBV09F of 2.2x-1.9x. However, HEXA’s current price is already beyond its intrinsic value thus we downgrade to Sell from buy.