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Wednesday, December 7, 2011

United Tractors - The Trident Is Getting Sharper

by Trimegah Securities

Strong Heavy Equipment Sales to Continue

With an average monthly sale of 712 units this year, we lift our 2011 sales assumption to 8,000 units. Using the same growth rate assumption, we expect the company to sell 8,910 units in 2012. Despite of the global economic slowdown, we believe that our assumption will be fully achievable.

We think that it is least likely for 2009 case (when sales declined by 28.4% YoY) to reoccur because unlike the financial market, the real domestic commodities sector is still running with full steam. Major ramping up projects and green field expansions will create more demand on heavy equipment going forward. With more than 60% sales go to the mining sector, we believe this strong mining activities will be a good catalyst for Komatsu sales.

It is also worth noting that there’s an infrastructure boom potential going forward, especially if the LCA bills could be passed by the parliament in 4Q11. In the last 5 years, 10-15% of Komatsu sales are designated to the construction sector.

Stable Growth on Mining Contracting

Business, Margin Improved Until 9M11, Pama has succeeded to remove 585.2mn bcm of overburden and 63.3mn tons of coal, an increase of 22% and 11%, resp ectively. Higher stripping ratio (9.2x vs. 8.4x in 9M10) has directly shown us the aggressive expansion projects conducted by our coal miners recently. Protected by a LT coal contract, we foresee a 10% growth for both overburden removal and coal extraction in 2012, in line with the management target. Learning from the past, Pama’s overburden removal was still able to grow by 24.9% and 35.2% in 2008 and 2009 when the coal prices dipped. To complement such positive growth, we also expect Pama’s margin to improve on the back of normalized weather going forward. Pama’s margin depressed to 14.9% in 2010 because of the increasing weather-related costs. We estimate Pama’s margin to reach 16.6% and 19.3% in 2011 and 2012, respectively.

Completing Coal Assets Portfolio, Ready to Expand

Equipped with Rp2.7tr - Rp3.6tr allocation from its recent right issue, UNTR has added its coal basket with 20% stake on Bukit Enim Energi, additional 30% of Asmin Bara Bronang and Asmin Bara Jaan, and 60% of Duta Sejahtera (which will provide the option to acquire 60% of Duta Nurcahya). We understand that major of its acquisitions are green-field assets with 2-3 years of development phase needed. However, looking at Pama’s reputation and experience on developing the mine sites, we believe that those green-field assets are already on their right owner.

Maintain BUY, TP of Rp31,200

We maintain our BUY call for the counter on the back of our positive view on its 3 business lines. UNTR’s defensive business model will also make the stock more favorable in the middle of macro uncertain environment. We raise our Komatsu sales volume and coal production, adjust the Pama’s margin to reflect the normalized weather, and incorporate our new coal price assumption. As a result, our FY12-FY13 EPS are increased by 19.7% and 15.2%, respectively.

On the other hand, we also raise our market risk premium by 25bps to reflect the unfavorable macro situation. All of these revisions have led to our new TP of Rp31,200, implying 14.8x 2012est PE Ratio.

Key Risks: In-house mining contractors will reduce miners’ dependency on third party mining contractor services, delayed on the expansion of its green field assets, and company’s rich valuation.

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