Sep 21, 2017 09:15:21

We think the consensus still has not fully factored in the sizeable growth of United Tractors’ mining heavy equipment sales in FY18F-19F, due to the replacement cycle for such equipment coming into effect post the 2010- 2012 sales boom. Its heavy equipment sales margin should improve, as the industry is now in a seller’s market. Maintain BUY, with a new DCF-derived TP of IDR35,600 (from IDR32,900, 16% upside) implying 15.1x P/E on FY18F EPS. Our FY18F EPS is 12.8% higher than the consensus’. A consensus earnings estimate upgrade would be a share price catalyst.

Komatsu sales to the mining sector to keep growing in the coming years. We expect the sizeable increase in mining heavy equipment sales units in 2017 to continue until 2019, as mining heavy equipment sales – which went through a boom in 2010-2012 – has just entered the replacement cycle. Also, we believe Indonesia increasing its FY17 coal production target by 9.9% YoY to a peak of 474m tonnes would boost demand for mining heavy equipment.

After-sales revenue to increase in the coming years. The company’s after-sales revenue, ie spare parts sales and after-sales services revenue, should increase in the coming years as well, after the guarantee periods for new mining heavy equipment end. This should lift its revenue and profit margins, as after-sales services have lucrative profit margins – higher even than that derived from selling heavy equipment.

Profit margins from selling heavy equipment should improve. United Tractors’ profit margins from selling heavy equipment should improve, as:
i. The heavy equipment industry is now back to being in a seller’s market;
ii. Selling mining heavy equipment generates higher profit margins, since this segment (ie units weighing 50 tonnes or more) has less competitors;
iii. Selling new mining heavy equipment should lift after-sales revenue (spare parts and after-sales services revenues), which carry lucrative profit margins.

BUY, with a IDR35,600 TP. We fine-tune our assumptions on mining heavy equipment units and their profit margins and tweak our FY18F-19F earnings by 5.2-8.7% respectively. Our new DCF-derived TP of IDR35,600 (WACC:13.4%; LTG: 2%) also implies 15.1x and 13.2x P/Es on FY18F-19F EPS respectively. Reiterate BUY, as we think the consensus still has not factored in the sizeable increase in mining heavy equipment sales in 2018F- 2019F. Equipment purchased during the sales boom of 2010-2012 has a replacement cycle that starts in 2017 and ends in 2019. We think the improvement in monthly heavy equipment sales would be a share price catalyst for the near term.

Key downside risks to our call are: a significant drop in coal prices, weaker-than-expected coal demand and a strengthening IDR. (Hariyanto Wijaya, CFA, CPA, CMT)