United Tractor (UNTR IJ) re-initiate coverage OPF; Indo coal shipment to Japan - CLSA Indo

United Tractors (UNTR IJ)

Sarina Lesmina reinitiates coverage on United Tractors with OPF rec and TP25,000 offering 14% upside. Sure there is significant short-term headwinds to UNTR from the natural disaster in Japan. It is still difficult to quantify supply disruption to UNTR’s heavy-equipment division (three equipment plants are damaged by the tsunami). Short-term risk also comes from uncertainty on PAMA, the coal mining contracting side from coal production and potential lack of Komatsu equipment. However, UNTR is dominant in both businesses and offers 28% ROE, 27% earnings growth, solid balance sheet and is one of the best run companies in the country. UNTR is also leveraged to the global hunger for seaborne coal. BUY on sharp correction.

Key points from report:
Short-term headwinds due to lower coal production at Pama, and disruptions from Komatsu. But good that UNTR has 2 months inventory
Global thermal-coal seaborne market is in supply deficit until 2013, a cumulative deficit of 75mt from 2009-13
Expect 10% Cagr in UNTR’s heavy equipment sales assuming Komatsu maintains 46% market share
Market leader in mining contracting (Pama) segment (40% mkt share), commands premium pricing due to better experience and scale
Expect coal production to grow 5% YoY (81mt) in 2011, & reach 93mt in 2012. Overburden removal to grow 10% YoY to 716mt in 2011.
Net gearing of 27% with expected earnings growth of 20% Cagr in the next 5 years
Expect minimum 40% dividend payout
TP 25,000, 14% upside, OutPerform. Based on average of PE, PB and EV/EBITDA valuation.

Channel checks, Coal shipment to Japan.
Mita “Komodo” Valina, CLSA’s on the ground specialist, spoke with some coal traders on Japan’s impact on their business. We know of at least 2 Japanese power companies that have declared force majeure, affecting 3.3mt/month in Indonesian coal exports. However, as most coal imports to Japan is from Australia, we expect limited impact to Indo’s coal producers, and might even see a surge in coal demand after the damaged infrastructure is fixed.