Deutsche United Tractors - Stronger heavy equipment sales, but clouded by heavy rains

Strong heavy equipment demand outlook
We have increased our heavy equipment sales forecasts by 9% to 5,500 units in 2010F, 6% to 6,050 units in 2011F and 2% to 6,655 units in 2012F to reflect buoyant coal price and improved demand from forestry sector amid industrial forest development especially in the light of de-forestation moratorium. Meanwhile, unfavorable weather continues in 3Q10 affecting the mining contracting rather than heavy equipment demand. As a result, we have lowered our coal delivery forecasts by 4% to 78mn tons in 2010F and 2% to 88mn tons in 2011F.

Reiterate Buy rating with target price of Rp22,300 (from Rp22,250)
The stock is attractive at 12.6x earnings in 2011F supported by exciting earnings prospect - delivering a 23% p.a. EBIT growth in the next two years - given buoyant commodity prices. Additionally, we believe operating performance and profitability weakness at the Mining Contracting division is only temporary awaiting weather improvement.

We have a new TP of Rp22,300 (from Rp22,250) to reflect greater heavy equipment sales, which is offset by Rupiah appreciation and weaker mining contracting's performance due to heavy rains. Our TP is based on a 10-year DCF valuation assuming a WACC of 15.9% (unchanged) - a risk free rate of 10.8% (unchanged), risk premium of 5.3%(unchanged), cost-of-debt of 2.1% (from 2.2%), equity to capital employed of 100% (unchanged), a terminal growth rate of 5% (unchanged - half of United Tractors' long-term FCF growth rate) and beta of 0.96 (unchanged).