Citigroup United Tractors - Accelerating Growth

 Raising target price to Rp22,900; reiterating Buy (1L) — The surge in heavyequipment sales lead us to raise our target to Rp22,900 from Rp20,300 following
upward earnings revisions. We have changed our valuation methodology to P/E from DCF as we believe the company’s outlook has improved and there is upside risk to our estimates. We now base our target on 15x P/E 2011E, reasonable in our view in light of the expected 14.5% three-year earnings CAGR and historical growth-period P/E of 12-15x. We continue to like UT for its solid outlook, good corporate governance and reasonable valuation.

 Stellar heavy-equipment sales — Rising commodity prices have underpinned impressive growth in UT’s Komatsu sales. March sales surged 157% yoy to 485 units, taking 1Q10 sales to 1,218 units – growth of 94% yoy. A low-base comparison notwithstanding, the upturn was remarkable as 1Q10 sales are just 8.5% lower than the peak in 3Q08 amid record commodity prices. We have raised our Komatsu’s sales estimate by 24% and 19%, respectively, for 2010-11E to 4,548 and 5,181 units.

 Coal mining contractor: Steady performance — Coal producers’ production rampup has boosted Pamapersada’s volume. Both Pamapersada’s coal production and overburden removal volume surged 27% y-y – in line with our estimates.

 Strong rupiah subdues earnings growth — As UT’s revenues are predominantly in US$, the sharply stronger rupiah (20% stronger yoy in 1Q10) means a substantial portion of the potential earnings growth from the robust volume growth would be impacted by forex translation. Hence, we expect just 17% yoy earnings growth in 2010E.