NISP UNTR Started to Post A Recovery

• Amid tough environment for mining related business, United Tractors managed to post subtle growth in revenue of 0.9% YoY to Rp21.3tn from Rp21.1tn in 9M08. Such growth was mainly due to Pamapersada Nusantara (UT’s coal contracting unit) achievement to record 32.9% YoY growth in revenue to Rp11.0tn from Rp8.3tn in 9M08. This was attributable to strong production volume and also more favorable mining contracting fee during 9M09 period. Pama managed to dig 48.3mn tons of coal in 9M09, 9.3% YoY higher from 44.2mn tons a year earlier.

• The company’s strong contribution from mining contracting managed to offset the declining heavy equipment and coal mining units’ revenue contributions to UT’s total revenue. Heavy equipment’s revenue dropped by 19.5% YoY due to lower 9M09’s sales volume at 2,237 units versus 3,823 units in 9M08 (-41.5% YoY). Meanwhile, coal mining
business posted 20.1% YoY lower in revenue as Dasa Eka Jasatama, UT’s coal mining unit, produced 36.8% YoY lower of coal in 9M09 at 1.8mn tons as compared to 2.9mn tons a year ago.

• Despite the slight growth in revenue, UT’s gross profit in 9M09 jumped by 19.7% YoY to Rp5.0tn, backed by lower direct cost from the company’s mining contracting and heavy equipment business. This was seen from gross margin in mining contracting that increased to 22.4% from 12.4% in the same period amid the combination of higher
production volume during and a lower fuel cost.

• Heavy equipment business’ gross margin also helped UT’s profitability as this unit posted an increase in gross margin to 27.1% in 9M09 from 21.7%. Stronger US$ in 1Q09 had helped the heavy equipment’s margin to soar as it was sold in US$ and UT recorded the revenue in Rupiah. This was on top of gain from lower finished good’s inventory cost.

• On a quarterly basis, the company also managed to post some improvements where revenue and net income increased by 7.2% QoQ and 2.7% QoQ to Rp7.4tn and Rp1.1tn respectively amid higher sales volume.

• Overall, UT’s 9M09 revenue came in at 71% of our full year estimates and 74.9% of consensus estimates. However, the company’s 9M09 net income came in at above our expectation at 90.6% and consensus at 86.0%. We foresee that stronger Rupiah has helped UT’s to post a lower than expectation cost during 9M09.

• We put our recommendation and target price for United Tractors under review. The company is currently trading at 2010F PER of 13.7x and EV/EBITDA of 6.2x.