United Tractors (UNTR-BUY-IDR23,950-TP:IDR35,000) Bulldozing forward - Bahana

Coal demand to remain supportive of Komatsu volumes
We frame the growth story of United Tractors (UNTR), based on coal demand’s defensive nature, even amid current global market uncertainties. In the next five years, we expect UNTR’s coal-related mining operations to account for two thirds of its operating profit, up from the current 42% (exhibit 14). In 2012, we expect continued strong demand of Indonesia’s thermal coal to be supportive of Komatsu 2012 sales volumes, growing at 15.0% y-y to 9,200 units, conservative compared to its 10-year CAGR of 32%. On the supply front, according to UNTR’s President Director, Komatsu Japan is fully prepared to fulfill any rise in heavy equipment demand next year. Recently, Komatsu contemplates possible relocation of its plant to Indonesia, given growing contribution from Indonesia’s mining sector. The establishment of a Komatsu plant in Indonesia would mean capacity expansions, key for UNTR’s maintenance of its leading heavy equipment distributor status in Indonesia (6M11 market share: 51%).

Aggressive coal-related expansions = stronger integrated model
In the coal-mining related units, we expect Pama’s 2012 overburden removal to grow 20% y-y to 898m bcm, mainly on higher production target of major coal producers. Furthermore, we expect 2012 gross margin improvement to 14.5% from 13.6% currently, on fewer rainfalls. On 2012 production, we expect coal volumes to reach 4.8m tons (+14.3% y-y), of which 2.5m tons from Prima Multi Mineral (PMM) and 2.3m tons from full-production of Tuah Turanggah Agung (TTA). In addition to 2 new green-field coal mines, UNTR recently signed an agreement to acquire 2 additional coal mines. While initial production on these assets will only occur in early 2013, we are of the view that stronger coal-chain units would strengthen UNTR’s integrated business model. Our initial calculation suggests that total reserve would reach more than 100m tons upon the completion of these acquisitions given annual production of around 10m–20m tons and overburden removal of 100m–280m bcm (based on stripping ratio of 6-7x). While we expect majority ownership to result in maximum value for UNTR, minority ownership on several coal assets would also be positive for Pama’s mining contracting activities.

Minor earnings changes; Raise TP to IDR35k based on 2012 valuation
While 1H11 earnings were in line with our previous estimates, we have made several adjustments to account for UNTR’s new guidance. On the top line, we raised our 2011 Komatsu unit sales 13% from 7,087 (+31.1% y-y) to 8,000 (+48% y-y), resulting in 11.8% higher consolidated revenues of IDR50t versus IDR45t previously. On the flip side, we cut our 2011 operating margin estimate from 14.9% to 13.5% on lower contribution from Parts & Services unit (6M11: 18% vs 6M10: 24%) and lower margins on its mining contracting division. Nevertheless, our higher revenues more than compensated our lower margins, causing 2011 higher earnings of just 2.8% to IDR5.3t and 3.5% to IDR6.4t in 2012. This and as we roll over our UNTR’s valuation to 2012, we arrive at higher DCF-based TP of IDR35,000 (44% upside). BUY.