Sunday, September 30, 2012

A glimmer on gloomy days

by Trimegah

Hexindo Adiperkasa
A glimmer on gloomy days
Grows amid woeful industry outlook

Backed by its solid positioning in agriculture and forestry segment, HEXA shows its optimism  amid Indonesia’s heavy equipment industry gloomy outlook in 2012 (Indonesia`s FY12 total excavator sales projected drop to 13,120 units, -4% YoY) by setting a positive growth target for FY12 excavator sales to 3,229 units (+10.7% YoY), comparable to our estimate of 3,300 units. Higher market share is also targeted at 24.6% (FY11: 21.35%). The management believes that the Company can achieve FY12 sales target by reinforcing customer relationship programs such as providing favorable financing schemes (90% sales via leasing) and improving after-sales services. Moreover, recently-launched product, Zaxis 5G Excavator Series, may turn to be successful as long as its claim to have the most economical operational cost can be proven. So far, HEXA efforts have been showing pleasant results; 3M12(Apr-Jul) Hitachi excavator sales rose 44.7% YoY to 1,028 units (vs. industry’s growth of 6.6% YoY to 4,383 units) while gaining wider market share of 23.5% vs. 17.3% in 2011.

Lower margins are expected in FY12

Management also disclosed HEXA’s FY12 revenues and earnings targets of USD739m (+9.8% YoY) and USD65m (-9.7% YoY) which are inline with our estimates of USD756m (+12.5% YoY, consensus USD672m) and USD65m (-9.7%YoY, consensus USD72m) respectively. Despite posting 3M12 gross margin of 19.9% and net margin of 10.1%, HEXA has projected lower FY12 gross margin of 19.2% (FY11 21%) and net margin of 8.8% (FY11 10.7%) to anticipate probable price war toward the end of the year and higher budget allocation for product-service related expenses like employee training and warehouse development (operating expenses projected to rise by 18% YoY to USD52m). Hence, given that HEXA`s FY12 guidance is within our expectation, we maintain our FY12 estimates.

Outperformance amid sluggish industry is a BUY
Unlike its competitors, the impact of slower mining-related heavy equipment demand should be subtler for HEXA overall sales performance, on the back of its strong exposure in agriculture and forestry sectors (55% of total sales volume). Hence, amid the timid projection of Indonesia’s excavator sales for 2012 which is backed by lower demand expectation from mining-related segments (mining sector contributes 65% to heavy equipment sales in Indonesia), we estimate that Hexa’s sales volume could reach 4,000 units (+21.2% YoY) with ASP of USD 230,000 per unit (+2.5% YoY) in FY13. Furthermore, as the assembly capacity has reached 5,000 units per year, we believe HEXA could maintain its growth momentum in the long run amid palm oil expansionary stage and gradual recovery on mining-related demand. We reiterate our BUY recommendation with target price of Rp10,000 which implies 2013 PE of 11.6x and 23.4% potential upside.

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