Bahana UNTR Never Give Up On Anything TP 22,000

Still tracking forward

Robust 2010 heavy equipment sales to compensate…
Continued recovery in the commodity-related sectors, low financing costs and ample liquidity have caused us to raise United Tractors’s (UNTR) 2010 Komatsu heavy equipment sales to 5,300 units (+70% y-y) from 3,811 units (+22% y-y) previously, translating into a 45% market share in the domestic market. Evidence of faster recovery can be seen from UNTR’s 1Q10 robust heavy equipment sales of 1,218 units (+93.8% y-y), accounting for 23% of our revised-up 2010 forecast. Furthermore, we have raised our revenue growth estimate for parts & services unit by 5ppts to 25% y-y (IDR4.5t), in line with the management’s guidance. Thus, we increase our 2010F top line by 8.5% to IDR37.3t (+28% y-y) and 2011F revenue by 10.4% to IDR43.3t (+15.9% y-y) with revenues from the mining-related divisions unchanged.

… lower earnings on margin compression caused by IDR appreciation
On the flip side, UNTR suffered margin contraction in 1Q10. First, there was higher COGS from the initial production of its new Kalimantan-based coal mine, PT. Tuah Turanggah Agung (TTA), expected to reach 2010 production target of 500k tons, 15% of our full-year estimate of 3.4m tons (the rest to come from the Dasa Eka Jasa Tama coal mine also in Kalimantan). Second was from the adverse impact of the stronger IDR which lowered margins on its mining division. This decreased UNTR’s 1Q10 operating margin to a more normalized level of 15% vis-à-vis 18% in 1Q09, prompting us to cut 2010F operating margin to 15.2% from 17.8% previously, lowering operating profit by 8.2% to IDR5.7t, still up 9.4% y-y. Nevertheless, this only caused slightly lower 2010 net profit IDR4.2t (-4.7%) and to IDR4.9t (-3.4%) in 2011.

Pama: Largest room for expansion among ASII’s subsidiaries
Despite lower operating margin, low 1Q10 rate of rainfall lifted coal extraction and overburden removal to 18.6m tons (+27% y-y) and 153.9m bcm (+27% y-y), in line with our estimates. It is worth pointing out that Pama would remain as the central focus of UNTR’s parent company, Astra International (ASII), in securing long-term growth. This suggests further expansions through acquisitions and higher mining contracts. Point in case would be Pama’s pending acquisition completion of two Kalimantan coal mines, which would alleviate the imminent risk of competition through stronger penetration from integrated players such as Darma Henwa (Bumi Resources), Buma (potential integration with Berau) and Sapta Indra Sejati (Adaro’s subsidiary).

Beneficiary of commodities expansion; retain BUY with IDR22,000 TP
Going forward, we are of the view that further expansions in the development of domestic commodities will continue to bolster UNTR’s business divisions, particularly its mining contracting unit in light of its largest capacity. In terms of valuation, we have raised UNTR’s target price to IDR22,000 on the back of lower risk free rate estimate of 9% (WACC:13.6%). Thus, in spite of UNTR’s 6% share price outperformance ytd, we reiterate a BUY.