Citigroup United Tractors - Buy: Firing on All Cylinders

 Reiterate Buy, raise target price to Rp20,300 — We raise our United Tractors (UT) target price to Rp20,300 (from Rp17,800) following upward earnings adjustments for FY10E-FY11E (on production ramp-up and improved outlook) and a lower WACC. While the share price has rallied 14% over the past three months, we think UT’s positive earnings growth (13.5% 3-year CAGR), supplemented by good corporate governance, warrants a return to a ‘growth’ period valuation of 12x-15x. At our new target price, the stock would trade at a 2011E P/E of 13.7x. We reiterate our Buy (1L) rating.

 Coal mining contactor: Beneficiary of coal price upcycle — Firmer coal price outlook and coal producers’ planned production ramp-up lead us to raise our coal production growth estimates for Pamapersada. However, we expect the strip ratio to stabilize at 8-8.5x in the next few years after surging from 6.5x in 2007. As a result, we expect more moderate overburden removal volume growth in the next few years from the 25%+ growth seen in 2008 and 2009.

 Heavy equipment: Peaking margins mitigated by higher volume — Robust demand from mining and agribusiness sectors lead us to raise our Komatsu 2010E-2011E sales estimates by 5%-14%. However, we think the rupiah’s material appreciation means margins could have peaked.

 More defensive play on coal price upcycle — We prefer coal miners (ITMG and Adaro) at this stage in the cycle for their more compelling valuations and more robust earnings growth. However, with stable earnings from its coal contracting unit, and diversified exposure to the broader commodities from its heavy equipment distribution unit, UT also holds appeal for investors, thus we retain our Buy rating.