Morgan Stanley UNTR

UNITED TRACTORS (UNTR.JK): LOW EXPECTATIONS; HIGH UPSIDE; REITERATE OW What's Changed Price Target: Rp6,500 to Rp5,7002009-11 EPS Estimates : Up by an average of 5%We reiterate our OW rating on United Tractors (UNTR), even though we are cutting our PT on the stock to Rp5,700, as it still offers 15% upside from current levels. At our price target, UNTR would trade at a 2009E P/E of 6.9x and a 2010E P/E of 6.0x, well below the stock's trough-cycle P/E of 9.0x, which we believe reflects UNTR's projected three-year EPS CAGR of -4.7%. While we believe UNTR's share price is overshooting to the downside, this situation could present attractive buying opportunities. We advise investors to accumulate UNTR stock, as: 1) the market appears to have factored in a significant decline in UNTR's 2009 machinery sales since 4Q08, and so we see no negative surprise; 2) UNTR's new 2009 machinery sales volume guideline appears to be overly conservative by historical standards, and so upside risks might be in the cards; 3) the machinery sales volume decline may not be affecting UNTR's earnings as much as the Street feared - mining contracting is now the key earnings driver; and 4) a stronger mining contracting business in 2009 could offset the weakness in the machinery division as margin adjustments in 2009 should be followed by normalization in 2010.
Risks to our call: 1) Coal price trend reversal; 2) significant delays in the coal asset acquisitions; 3) steep appreciation of the rupiah vs. the US dollar; 4) execution risks and delays in the timely delivery of the government power plant projects; and 5) political concerns in Indonesia during the general election in 2009.