CIMB UNTR.JK, UNDERPERFORM - Downgraded

(UNTR IJ / UNTR.JK, UNDERPERFORM - Downgraded, Rp5,900 - Tgt. Rp6,200, Industrial Goods and Services)

Strong Jan 09 heavy equipment sales for UNTR could be misleading, as around 50% of the sales were made to Pama, up from the historical average of 15%. Downside risk is high, in our view, given weak commodity prices and financing difficulties. On the other hand, we raise our earnings forecasts for UNTR by 7-16% for FY09-10 to account for higher coal prices. Among its business units, Pama and coal mining are on surer footings but that is largely in the price, we believe, given UNTR's premium to coal stocks. On valuation grounds, we downgrade the stock to UNDERPERFORM from Neutral albeit with a higher DCF-based target price of Rp6,200 (from Rp5,200) following our earnings upgrade.

Mandiri Sekuritas UNTR A Better Tomorrow

Our survey on leasing companies indicates that leasing rate for heavy equipment remain high at 22-25% p.a. Jan09 sales (+53.2% mom) rebounded, easing the worry when the month after Moslem Festive did not rebound in Sep08. Our survey on listed mining companies also indicates that demand for mining contracting remains robust. Thus, we upgraded FY09F-FY10F earnings projections by 29.7-36.6% on higher extraction and overburden assumption. We also assigned new corporate tax rate on our valuation. Ultimately, we reiterated our Buy stance at new T! P of Rp7, 800/share, implying a target PER09F of 9.8x.

BASML BUMI 4Q results preview

results likely below our expectations
Bumi is expected to release its fully audited FY08 results on 31 March. We expect EBITDA to grow 210% to US$1.47bn and net profit 136% to US$700mn. However, we sense BUMI’s operating income will come in below our and market’s expectations (US$1.3bn) due to sales-volume slippage, as well as rising demurrage and commission fees. This is likely to be offset by a lower tax rate.

Operating performance could be below our expectations
The main culprits we see are slippage in sales volume and higher costs due to rising demurrage and commission fees, which are likely to offset falling diesel prices. Some 1-2 shipments deferrals and a breakdown in ship loaders were reported in 4Q. In addition, we could see a higher demurrage fee due to heavy rainfall. We see potential volume slippage up to 4mn t and higher sales/GA expense by roughly US$3/t.
FY08 results likely below our expectations.

Price objective basis & risk Bumi Resources (PBMRF)
We have assigned a PO of Rp550 for BUMI based on DCF. To derive our NPV, we use WACC of 30%, debt to equity ratio of 20:80, ERP of 13.0%, RFR of 15.5%, and cost of debt of 10% to derive a cost of equity of 35%. We assume a coal index of US$130/t in 2008, US$80/t in 2009, 2010, and 2011, and US$74/t LT price.
Risks to our PO: 1) Regulatory changes in Indonesia, including expiration of mining licenses. 2) Shareholder corporate governance uncertainties. 3)Disruptions to operations and/or projects under development. 4) Thermal coal and oil price volatility. 5) Global coal demand slowdown. 6) Rp/US$ exchange volatility. Upside risks: 1) potential change in shareholders 2) settlement of shareholder Repo problem and 3) recovery in coal price.

MacQ Asian coal (Update2)

No skinny dipping allowed

Potential for margin squeeze?
We forecast oil to rally from current levels of US$45/bbl to roughly US$80/bbl vs coal, which we think should remain relatively flat at around US$70/t. This is as a result of there being no “OPEC” for the coal industry to co-ordinate thermal coal production cuts (in contrast to the oil industry).

We therefore prefer those low-cost producers with net cash balance sheets such as Shenhua, China Coal and PTBA. Bayan and ITMG’s earnings could be at risk if they do not actively manage/hedge costs.

Take profits in Indika and Hidili; Run from Bumi
We downgrade Indika from Outperform to Neutral after its recent 42% rally. The stock looks fully valued, trading close to our revised price target of
Rp1,300 (6% downside).
Also, we downgrade Hidili from Neutral to Underperform and lower our earnings estimates and our price target to HK$2.10 on production and coking coal price concerns.
Bumi: We reaffirm our Underperform recommendation and Rp500 price target due to a lack of transparency regarding recent transactions and future cashflows. We arrive at our price target by applying an 80% discount to an NPV valuation. We acknowledge that this discount is somewhat arbitrary, but consider this appropriate given the lack of clarity over future cashflows.

MacQ Asian coal (Update1)

No skinny dipping allowed
Don’t get caught naked on coal price…. Stay defensive

Our global commodities team has downgraded its 2009–11 thermal and coking coal forecasts to US$70–75/t and US$110–140/t, respectively. Although this appears to be getting close to the cost curve, our coal traders believe the spot market could remain volatile. Consequently, we maintain our preference for the following.
Domestic or locked-in price plays over open book exporters.
Thermal over coking coal plays.
Low-cost producers with strong balance sheets.

Locked-in prices rule: China Coal and PTBA top picks
We prefer domestic defensive thermal plays such as China Coal, PTBA and Shenhua, as these companies seem to have less consensus earnings risk because domestic prices are less cyclical and trade off a lower base vs export prices. SAR is also defensive because roughly 80% of its 2009 production is priced at US$111/t.

But don’t forget about Banpu and UNTR
Consistent with our defensive thesis, we like Banpu (due to its 18.1% FCFE generation and 8.1% estimated dividend yield from power plants and liquidity for 2009) and UNTR (due to its strong pricing power, sensible management and attractive valuation of 6x PER 2009E).