United Tractors (UNTR IJ) (Outperform) - More good news from Komatsu - Macquarie Research

Event
· Komatsu announced updates on the recovery progress of its production facility in Japan. We are encouraged to learn that the main factories should resume operations very soon (with the Oyama plant back in operation since 18 March). This reinforeces our view that the impact from earthquake on the company is relatively marginal. Several key highlights follow:


Impact
· Impact from earthquake to be relatively marginal. This is driven by the resumption of production at major factories, including Ibaraki plant (dump-trucks and large size wheel loaders) and Koriyama plant (hydraulic cylinders and components) should resume operations very shortly. The Oyama plant, which produces diesel engines and hydraulic components, restarted operation on 18 March. This is supported by United Tractors' 2 weeks of ready-to-sell inventory and relatively limited equipment supply exposure to Japan (maximum 20-25%, mainly big excavators). Therefore, we reiterate our equipment sales forecast of 6,250 units (with potential upside to 6,500 units, in line with Komatsu's written commitment).
· The key risks now is availability of electricity and third party components supply. This is as we understand that electricity in the impact zones (including Ibaraki, Oyama, and Koriyama) are still operating on a rolling blackout. Further, we highlight the risk from third party suppliers as around 30 third party suppliers out of more than 200 that the company used have suffered serious damage both in terms of manpower and facilities.

Action and recommendation
· We reiterate our view on that the earthquake has a relatively marginal impact on United Tractors. Therefore, we reiterate our Outperform recommendation on the stock as it benefits from the higher coal price environment (via higher equipment demand and coal contracting work) as well as coal price leverage (from the company's internal coal mines) and sensible valuation as it trades on 13.5x 2011E PER vs. the market at 13x (vs. 10% premium historically). Further, we see the next catalyst for the stock as being continuously strong equipment sales and improvement in the coal contracting margin, which we expect to see starting in Q2 (seasonally dryer season).