UNTR Not many surprises in FY10 results; maintain U/P - BoA Merrill Lynch

FY10 results in line with expectations
UNTR announced FY10 results last week, which were in line with expectations. FY10 NP came in at Rp3.8tn, flat YoY, 3/4% below our/consensus estimate. 4Q NP, at Rp913bn, was up 7% YoY but down 15% QoQ. FY10 EBIT came in flat at Rp5.16tn, even though FY10 revenue rose 28% YoY to Rp37.3tn. While we like UNTR’s business, we think share price (up 60% in 2010) has run ahead of its earnings growth and UNTR is now fully valued. We see more downside risk to our numbers, considering a potential I/R hike, rising competition, and a stronger Rupiah, and hence do not recommend investors to buy UNTR now.

Mining contract margin still facing headwinds
In 4Q, Pama’s mining contract margin showed a 60bp improvement to 14.2%, but it still fell short of its 16% target. We think it is difficult for Pama to achieve 16% in 1Q11 given the continuing bad weather. We even found in our recent trip to Kalimantan 10 hours of daily rain in February in some coal mines. Coupled with the stronger Rupiah, we see downside risk to Pama’s margin in 2011.

Equipment sales strong, but competition is intensifying
Komatsu heavy equipment sales volume rose 74% YoY to 5,404 units. Its market share in 2010 was relatively stable at 46% (vs. 47% in 2009). But we noted during our recent trip that competition with Sumitomo joining Komatsu, CAT, and Hitachi in building production facility in Indonesia was rising, and CAT was expanding its operations here. By having proIduction facility locally, distributors can save on capital goods tax and shipment costs, and hence can lower selling price. For 2011, we project another 11% growth, of which we expect demand from mining sector to grow 30%, agro to be flat and construction / forestry to drop 15%.

Stronger Rupiah bad for UNTR, in our view
We think stronger Rupiah is negative for UNTR’s earnings. Besides Scania and Nissan (7% of total construction machinery), which are sold in original currency, UNTR earns all its revenue in US$ terms, but 90% of its expenses are in that currency. Pama earns all its revenue in US$ terms but only 60% of its expenses are in that currency. But UNTR’s financial reporting is in Rupiah, so we estimate a 10% appreciation in Rupiah could negatively affect EBIT by about 18%.