Mandiri Sekuritas UNTR: Upping the ante

UNTR continued to surprise us with sustained qoq growth driving 9M09 net profit to Rp2.96tn (+42%yoy) easily way ahead of targets as this presents 90% and 85% of ours and consensus FY09F. With improving heavy equipment sales outlook topped by the capacity to address demand upswings, we upgraded FY09-10F earnings by 11% and 10% from the previous estimates. Our revised DCF-derived target price now stands at Rp19,600/share. Maintain buy.

Strong mining contracting while maintaining market leadership in heavy equipment. . For 9M09, mining contracting posted revenue of Rp11tn, up by 33%yoy equating to 52% of UNTR’s revenue. Higher volume of production and overburden removal as well as favorable exchange rate has also leveled up margins. On the heavy equipment side, sales were still down by 20%yoy to Rp8tn of which Rp4tn came from Komatsu sales, whose sales volume declined to 2,237 units (-42%yoy), but continued to be the market leader with 49% market share. The rate of decline was also partly mitigated by the stronger-than-expected performance of its parts and services whose sales grew by 25%yoy to Rp2.71tn.

Changes in the mining law would have no effect for now on current operations. 3 main points were discussed in the recent analyst meeting namely (a) Scope of work of mining contractor to be limited to overburden removal and coal extraction; which the company believes has gray area given a section of the law states there is no restriction of such. (b) Restriction of affiliated co’s to conduct business; which defines affiliate as having direct/immediate relationship. In UNTR case, Pama is not directly related to TTA. And (c) for! eign part icipation; which would allow foreign mining contractors to enter the Indonesian market should local players lack capacity and resources to serve demand, which currently is being dutifully met by local mining contractors. Likewise, given the 3-year transition period to get this law into effect, anything can change within that period.

Upping the ante to a TP of Rp19,600/share. Based on better outlook for heavy equipment and the inclusion of coal sales from TTA of 1Mt next year and 2Mt tons in subsequent years, which results in better earnings profile, we re-upped our TP to Rp19,600/shr exhibiting a PER09-10x of 13.7 and 12.0x, respectively.