Friday, January 6, 2012

United Tractors - Unleashing Coal Business Potential

by Ciptadana Sec


We initiate our coverage on United Tractors (UNTR) with BUY recommendation on the back of 1) solid heavy equipment demand 2) sturdy coal mining activity from increasing production and 3) accelerating contribution from its coal mining business.

Our valuation of UNTR is based on DCF valuation method assuming a WACC of 12% and a terminal growth of 3%. We arrive at a target price of Rp31,150, at which UNTR is trading at 20.8X FY11F PF, 16.6X FY12F PE and 13.6X FY13F PE.

Outstanding 2011 Komatsu sales growth which is expected to keep growing 2011 has been an outstanding year for Komatsu heavy equipment sales which grew by 55% yoy as of 9M11 reaching 6,396 units or achieving 80% of UNTR FY11’s target. Mining sector was the main growth driver with 73.6% yoy increase followed by Construction sector (+48.6% yoy) and Agro sector (+28.2% yoy). Next year, we expect Komatsu sales volume to grow by 16%, reaching 9,501 units, supported by robust demand from mining, agri, and construction sector.

Tapping the opportunity from Indonesia rising coal production

Indonesia coal production has been growing at 12.5% FY05-10 CAGR and is expected to reach 327mn tons (+19% yoy) this year and 332 mn tons (1.5% yoy) next year according to the energy and mineral resources ministry. Meanwhile, Indonesian Coal Mining Association (APBI) estimates coal production to reach 340mn tons and 370mn tons for FY11 and FY12, an increase by 23.6% yoy and 8.8% yoy respectively. We believe the increase is driven by rising coal demands, both from domestic and export. As the market leader in mining contracting business, UNTR through its subsidiary PT Pamapersada Nusantara (Pama) will benefit from the growing coal production in Indonesia, especially from those of its clients. Thus, we estimate that next year Pama could achieve another 10% and 9% increase for coal production and overburden removal respectively.

More acquisition, more contribution

As of Sept-11, UNTR has about 254-369mn tones of coal reserves and targets to achieve 500mn tons of reserves through acquisition. It recently acquire 60% stake on Duta Sejahtera (DS) at US$11.5mn with an option to buy 60% stake in Duta Nurcahya mine.

Currently, UNTR is eyeing two coal mining concession in its pipeline and is conducting the due diligence process. Therefore, we believe UNTR is on its track to achieve its target of 500mn tons coal reserves and expect the contribution from coal mining business to reach 10% this year; further growing to 14% next year.

Buy with target price of Rp31,150

We initiate UNTR with BUY recommendation with a target price of Rp31,150, implying 20.8X FY11F PE, 16.6X FY12F PE and 13.6X FY13F PE; 19.6% upside from yesterday closing price. We value UNTR using DCF valuation method assuming 12% WACC and 3% terminal growth. Risks to our view include: 1) regulatory risk 2) volatility in commodity price 3) fluctuation in exchange rate 4) fierce competition 5) obstacles in acquisition.

Risk to our view

Regulatory risk

Coal mining business in Indonesia is exposed to several government law such as mining, forestry, and environmental regulation. Therefore any changes in government regulation will impact the industry.

Volatility in commodity prices

Given its strong dependency to commodity, especially coal, any volatility in the commodity prices will affect UNTR.

Fluctuation in exchange rate

All of UNTR’s revenue is denominated in USD and its financial is reported using IDR base, so any fluctuation in the currency will affect UNTR’s financial results.

Fierce competition from other heavy equipment brands

The growing demand for heavy equipment in Indonesia could invite other heavy equipment brands to enter the market. The aggressive pricing strategy that might be implemented from some Chinese brands could aff ect Komatsu’s market share.

Obstacle in acquiring new coal mines

The sustainability of UNTR’s coal mining business will depend on its ability to acquire new coal mining concession, thus UNTR will pose with risks for any difficulty in acquiring new mines in the future.

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