Nov 08, 2016 19:10:33

United Tractors ($UNTR): FY17 Management Guidance Confirms Our Bullish View

We have turned bullish on United Tractors since our August 2016 report “Still At Beginning Of Upcycle, Time To Accumulate”. Management’s guidance for FY17 operational targets, disclosed yesterday, confirms our bullish view as the management guides for higher heavy equipment sales units (mining and construction as key drivers), higher spare parts sales, higher mining contracting volume with better mining contracting fee and higher coal sales. We reiterate our BUY call with TP of IDR24,700 as we think revising up consensus earnings ahead should boost its share price.

¨ Higher mining contracting volume with higher mining fee. Mining contracting business is the main contributor to its consolidated earnings (51% of 9M16 consolidated gross profit). The management, who always give conservative guidance, guides its FY17F overburden volume and coal volume to grow by 10% YoY and 5% YoY respectively. The management thinks the FY17 strip ratio will increase and expects its mining contracting fee to recover in FY17F due to a lower discount on its mining contracting fee, which should improve the gross margin of its mining contracting business.

¨ Komatsu sales volume to recover with mining and construction as drivers. The management guides Komatsu sales to recover to 2,500 units in FY17F, which would be driven by demand from mining and construction sectors. Sales composition of big-size heavy equipment is expected to increase in FY17 due to higher demand from coal mining sector, which comes from medium to large coal miners. Currently, United Tractors has only a few big-sized heavy equipment items on its balance sheet and it takes around three months’ time from receiving order to deliver to its customers.

¨ Sales of spare parts to increase due to refurbishment cycle. Management describes that its spare part sales is on an increasing trend over the last two months, which was driven by resuming operation of some heavy mining equipment. Management estimates the refurbishment cycle of peak heavy equipment sales from 2011 should increase its spare part sales in FY17.

¨ Mining coal sales to increase to 7.5m tonnes in FY17F. as management guided for coal sales to increase to 7.5m tonnes. The volume increase comes from a ramp up in the production of its subsidiary, i.e. PT Asmin Bara Bronang.

¨ Unlikely to reverse impairment loss. Due to a slump in coal price until the beginning of 2016, United Tractors booked sizable impairment losses in 2014 and 2015. Based on our discussion with United Tractors, although coal price recovers, they are unlikely to reverse the impairment losses.

¨ Reiterate BUY with a IDR24,700 TP derived from DCF which implies a 14.9x FY17F P/E. We think consensus earnings upgrade post management guidance on FY17 operational targets should increase further the share price.