United Tractors - Strong 2Q11 results; improving mining contracting - Deutsche Bank

Reiterating Buy rating
We remain upbeat on United Tractors' outlook, supported by high coal prices.
These bode well for all three of its divisions, which would benefit from buoyant
heavy equipment, greater demand for mining contracting services, and stronger
earnings from its coal assets. In addition, we expect weather normalisation, which
has already started in May, to improve earnings and margin contributions from its
mining contracting (MC) division, which accounts for 40-50% of earnings.

Strong 2Q11 earnings performance
Even with a stronger Rupiah and equipment supply disruptions, UNTR recorded a
strong YoY performance in 2Q, given stronger earnings from the construction
machinery (CM) division following a faster-than-expected supply recovery. In
addition, we note strong earnings and margin improvement at the MC division, as
weather normalised in May-June. The 2Q11 results could have been better than
those of 1Q11 if not for supply constraints following Japan’s catastrophe and a
weaker margin at the coal mining division. Overall, 1H11 results are largely in line
with our 2011 forecasts, some 12% above market consensus.

Expecting stronger earnings performance in 3Q11
Notwithstanding a stronger Rupiah, we expect stronger earnings in 3Q11
supported by 1) stronger MC performances following weather normalisation and
2) higher CM heavy equipment sales due to Komatsu supply recovery.

Maintaining target price at Rp32,000
Our target price is based on a ten-year DCF valuation using a WACC of 14.6% and
terminal growth rate of 5%. Risks: upward integration at coal companies and a
sharp decline in coal prices (see pages 4-5 for more details on valuation and risks).