Friday, November 2, 2012

United Tractors : HOLD; Rp20,950;

by DBS

Price Target : Rp21,250 (previous: Rp22,300); UNTR IJ

Earnings risk remains
· 3Q12 net profit in line
· Spare parts division supports Komatsu’s margins
· Cut FY12-14F earnings by 1-5% after imputing lower Komatsu and Pama sales
· Maintain Hold, trimmed TP to Rp21,250.

3Q12 profit in line. United Tractors (UT) reported  3Q12 net profit of Rp1.4tr (-11% q-o-q, -25% y-o-y). 9M12 net profit of Rp4.5tr made up 77% of our full year forecast, in line with our estimates as we expect weaker earnings in 4Q12 driven by lower contribution from Komatsu. UT sold 5,455 units of Komatsu (-15% y-o-y) due to slowing demand from mining sector while coal producion and overburden at Pama grew by 9% supported by large contracted volume. However, we see risk on Pama’s growth prospects next year if coal prices stay low as it will reduce incentive to coal miners to expand production.

Short-term outlook remains weak as we expect commodity prices to remain muted in 2013 due to the weak macro outlook which will discourage investment and production growth due to thin margins. Declining utilisation rates of mining equipment (<75%) and lower capital spending for expansion indicates that demand for equipment is unlikely recover quickly.

Maintain Hold, trimmed TP to Rp21,250 (from Rp22,300)  after imputing 1-5% lower FY12-14F earnings. The sharp drop in share price (>35% from peak in March) reflects that most of the negatives have been priced in, however we believe that higher commodity prices are necessary to support a more sustainable recovery in earnings.

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