Dec 01, 2016 23:04:38

United Tractors ($UNTR): Weakening IDR and Coal Price Recovery Play

We think United Tractors should be a good play to monetise the weakening IDR and coal price recovery. We opine that IDR is to weaken further to IDR13,700 in FY17 vs IDR13,290 YTD. Therefore, Pamapersada’s profit margins as the biggest contributor to consolidated earnings should expand. This is on the combination of the weakening IDR and mining contracting fee recovery. We also believe heavy equipment sales would increase. This is due to the sizable rise in customers’2017 capex for such equipment. Reiterate BUY with a higher IDR26,300 TP (from IDR24,700, 20% upside).

¨       Beneficiary of a weakening IDR. We opine that the strengthening USD should cause the IDR to weaken further and average at IDR13,700 in FY17 vs IDR13,290 YTD. The USD’s contribution to PT Pamapersada Nusantara’s (Pamapersada) revenue and costs is at 100% and 60% respectively. Its gross margins, the biggest contributor to United Tractors’ consolidated earnings, tend to expand when the IDR weakens (Figure 1). We expect Pamapersada’s gross margins to expand to 22% in FY17 on a weakening IDR and recovery in mining contracting fees. This is due to the recovery in coal prices.

¨       Heavy equipment sales to improve sizably in FY17. We did channel checks on Delta Dunia Makmur. Its subsidiary PT Bukit Makmur Mandiri Utama (Bukit Makmur) is Indonesia’s second-largest coal mining contractor. Bukit Makmurhas allocated a sizable USD180m capex for FY17 (FY15: USD55m) (Figure 4), which is mainly slated for the purchaseof heavy equipment. This is because Bukit Makmur wants to replace some portions of its mining contracting heavy equipment fleet. This should boost United Tractors’ Komatsu and Scania unit sales for the mining sector during this period.

¨       Reiterate BUY, with a higher IDR26,300 TP. We fine-tune our assumptions on the IDR to accommodate the view that the currency would weaken further. This results in higher FY16-18 EPS by 4.6-7.2%. We reiterate our BUY call with a higher DCF-derived IDR26,300 TP (WACC:12.2%, LTG:2%), which implies 14.8x P/E on our FY17F EPS (its 6-year mean P/E). The call is retained as we think its FY17 earnings recovery has still not been fully factored in by consensus and share price. Our FY17F EPS is 22.5% higher than consensus. We think revising up FY17F consensus earnings should boost share price.

¨       Key risks to our BUY call include coal prices decreasing to <USD50/tonne and a strengthening IDR.

¨       October’s operational performance keeps improving. Pamapersada keeps booking improving mining contracting volumes (Figure 5). Its October coal production grew 15.1%YoY (+10%MoM) due to the recovery in coal prices. We think the decrease in stripping ratio to 5.9x in October is just temporary. This is because coal companies are likely to increase their stripping ratios in FY17, based on our channel checks. United Tractors booked 218 Komatsu sales units (+207%YoY, +7.4%MoM), with the construction and agro sectors as the drivers of growth. (Hariyanto Wijaya, CFA, CFP, CA, CPA)