United Tractors Overweight UNTR.JK, UNTR IJ 1Q Results: PAT as expected, mining contracting margins a setback - JP Morgan

• 1Q PAT Rp 1.32 trn - in line with JPM – probably positive relative to consensus: UNTR’s 1QFY11 PAT of Rp 1.32 trn was 2% below JPM estimates of Rp 1.35trn. Profits grew by 45/44% y/y/q/q and at 27% of consensus FY11E PAT, we believe will be well received by the street.

• Equipment ASP’s better than expected – Mining contracting margin recovery hopes belied: Equipment division sales were 8% higher than forecast on higher ASP’s, which could be deceptive since UNTR reports revenues net of interdivisional sales, but equipment volumes gross of sales to its mining contracting division. Gross Margins 40bps q/q. Equipment margins came down as expected to 21% (JPME 21.1%) on
lower services contribution. Mining contracting was slightly disappointing with 1QFY11E margins down 213bps q/q to 14.3% (JPME 16%) despite higher strip ratios. This remains an area of concern given a strong Rupiah. UNTR earned $19/T of own coal sales.

• Net Gearing at 17%, inventory decline to foreshadow slowing volumes? UNTR reported Net D/E of 16.7% at the end of 1Q. Capex during the quarter was Rp 1.13trn, predominantly on mining contracting even as new contracting subsidiary Multi Prima (a new investment thrust) only saw an increase in assets of Rp 197bn. Finished goods inventories declined by Rp 831bn during the quarter – perhaps pointing to slowing Komatsu deliveries in months to come.

• Price target Rp 25,000 (ex rights) remains OW: At 17.5x FY11E PE, we believe UNTR’s pedigree is well recognized in its stock price. However, current results could catalyze some near term upside, which is key to our maintaining an OW rating on the stock despite the overhang from its proposed rights issue. Noting better than expected Komatsu volumes, we identify a strong Rupiah as a key risk to our PT. If the Rupiah stabilized at Rp 8600, we see a 10% risk to our FY12E EPS.