United Tractors (UNTR IJ, Rp24,350 BUY) United we stand - Danareksa Sekuritas

Maintain BUY despite slightly lower TP
We remain upbeat on UNTR despite the stronger expected IDR and believe that the company is in a great position to capture growth in the resurging coal mining industry. To reflect the recently released FY10 results, we incorporate our latest USD/IDR exchange rate and oil price assumptions, and also adjust our heavy equipment sales and coal mining contracting targets, as well as our coal mining operations sales target. Consequently, our FY11-12F EPS estimates are adjusted down by 3.8-1.9% - only a slight reduction. Our slightly lower TP of Rp27,000 implies P/E 11-12F of 17.6-14.7x, admittedly at the high end of the historical P/E, yet justified thanks to higher coal prices and the ongoing recovery taking place in the coal mining industry.

FY10 results in line
UNTR’s 12M10 operational and financial performance is broadly in line with our forecast. Compared to 3Q10, the 4Q10 gross margins showed an improvement in all business segments. This was thanks to less one-off charges for extra maintenance arising from the heavy rains in the mining contracting and coal mining business. It indicates that the operating environment for mining contracting and coal mining was much better in 4Q10 than in previous quarters. Net profits declined, however, in 4Q10. They dropped 17.9% qoq due to higher employee costs and strengthening of the rupiah.

Set for operational improvement this year
We raise our Komatsu heavy equipment sales assumption to 6,000 units this year, or in line with UNTR’s guidance. Pama’s coal production and overburden removal, meanwhile, is expected to grow 15%, while DEJ and TTA are expected to sell 2.5Mt and 1.5Mt of coal, respectively, this year. All in all, the outlook for the mining industry is rosy and the ongoing recovery should continue as the weather returns to normal by the winter of 2011 (or June 2011 in Australia). This will translate into better profitability in all business segments, we believe. Further underpinning our confidence are UNTR’s excellent 1M11 operational results, with yoy growth in all segments. In this period, Komatsu heavy equipment sales recorded breakneck 116% yoy growth; Pama’s coal production and overburden removal was up by 5.0% and 19.7% yoy, respectively; and DEJ’s sales increased by 2.6% yoy.

The main risks are IDR strengthening and higher oil prices
The main risks to earnings that the company faces are IDR strengthening and surging crude oil prices. This is because: 1) UNTR gains most of its revenues in USD, while around 20% of its costs are denominated in IDR and 2) higher oil prices would mean additional costs in its mining contracting and coal mining operations, although Pama would, for the most part, be able to pass its higher fuel costs on to coal companies. We assume an average FY11F IDR/USD exchange rate of Rp9,117/USD and oil price of US$90/barrel. Our sensitivity analysis shows that for every 2.5% fluctuation in the IDR/USD exchange rate, the FY11F core profit will change 3.4%, while for every 5% fluctuation in the oil price there will be a 2.1% change in the FY11F core profit.