Company update:
United Tractors (UNTR IJ, BUY, TP: IDR20,900),
Still At Beginning Of Upcycle, Time To Accumulate.
United Tractors (UNTR IJ, BUY, TP: IDR20,900),
Still At Beginning Of Upcycle, Time To Accumulate.
Coal
prices are recovering, which should boost United Tractors’ FY17 earnings from
mining contracting and coal-mining. We fine-tune our assumptions and upgrade
FY17F-18F earnings by 20.1-23% to reflect the impact of the coal price
recovery. We roll forward our valuation to FY17. Upgrade to BUY, with a DCF TP
of IDR20,900 (from IDR11,800, 28% upside) – 14.0X FY17F P/E, which is its
10-year mean P/E. This is due to its earnings recovery expected in 2017 (which
we think is still not reflected by the consensus and in its share price) as
well as its undemanding valuation. Our FY17F EPS is 13.5% above consensus.
¨ Coal prices are
recovering. Due
to environmental issues, the Chinese Government aims to cut its coal production
by 500m tonnes in the next three years. In order to achieve the target, China,
as the biggest producer and consumer of coal, has been slashing its supply
since early 2016. China’s production cut began to impact the market in April, as
it gradually cut down its inventory level and increased coal imports. The
decline in China’s coal supply cut should put coal prices in the direction of a
recovery.
¨ Mining contracting
volume should recover from 2017. On the continuous recovery in coal prices,
with China cutting its coal production and Indonesia being its top importer, we
expect the production volume of PT Pamapersada Nusantara (PAMA) (a United
Tractors subsidiary) as the biggest coal mining contractor in Indonesia, to
resume growth in FY17. This will also widen its profit margins. We estimate
PAMA’s FY17F stripping ratio to recover to 7.4x (FY16F: 6.9x). During times of
boom and boost in the last 10 years, Pamapersada’s stripping ratio has ranged
from 6.5x to 9.2x.
¨ Coal-mining business
another driver of growth in FY17. We expect coal-mining to be another driver of
United Tractors’ FY17 earnings growth. Growth will mainly be driven by a higher
coal sales volume and the recovery in the selling price of coal. United
Tractors’ PT Asmin Bara Bronang (ABB) is on track to increase its coal output
in FY17. We expect United Tractors to sell 8.1m tonnes of coal in FY17, vs 6m
in FY16F.
¨ Upgrade to BUY with a
DCF-derived TP of IDR20,900. We think all negative news on United
Tractors have been priced in. Moreover, FY16F consensus earnings have already
been trimmed down by 24.9% since Jun 2015. We roll forward our valuation to
FY17, fine-tune our FY17F-18F assumptions to factor in the recovery in coal
prices and upgrade the stock to BUY with a DCF-derived TP of IDR20,900
(WACC:13.7%, long-term growth: 2%). The recovery in coal prices should improve
its FY17 earnings, which is still not reflected by consensus estimates.
¨ Key risks to our BUY
call include
changes in China’s policy to cut down coal production, weaker-than-expected
coal demand in China, faster-than-expected coal self-sufficiency in India and
the IDR strengthening against the USD.
Best regards,
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
