United Tractors (UNTR IJ; CP: IDR24,300; HOLD) Target Price: IDR24,500 - BNP Paribas

Key issues:
ƒ July volume for heavy machinery is expected at around 720 units, a bit lower than June's 740, but still indicating very strong demand, especially from the mining sector – buoyed by relatively high coal prices.
ƒ Management, having consulted with Komatsu of Japan, is likely to raise their target in heavy machinery volumes from 7,500 to 8,000 given the continued strong demand and the fact that supply disruption from the tsunami is now no longer a factor.
ƒ The weather has started normalising, with less rain in May. This is positive for the mining contracting business which previously had to shoulder the burden of increased costs from additional work due to heavy rains.

Question raised:
ƒ 1H results were good but there are clear signs that margins are under pressure from stronger currency. Can management do anything about this? Management agrees that this is something that is not under their control. The contract mining business suffered the most as around 40 percent of their costs are in IDR while most of their revenues are in USD. The only way they can make up for the difference is if mine owners were to increase production.
ƒ Margins in the heavy machinery business also seemed to be under pressure despite the fact that only 10% of cost is in IDR. Why? This is more to do with the product mix. In 1H11, due to high demand from the mining sector, volumes from equipment, especially the big machinery, made up for a larger proportion. Equipment sales, especially the big ones, command lower margins than after-sales services and small to medium size equipment.

Current view:
ƒ While we are impressed with the company's achievements, we believe the strong currency is going to weigh on their performance. The fact that valuation is also extended makes us cautious on the stock. Maintain HOLD, TP IDR24,500, prefer to get exposure through ASII IJ, TP IDR80,000.