RHB Indonesia Morning Cuppa - 12 August 2016 - (United Tractors)

Good morning,

United Tractors: China’s Domestic Coal Production Cut Is On Track

China’s effort to cut domestic coal production is still on track, as its monthly coal production levels keep showing lower numbers. July’s imported coal volume was flat due to a high base effect in Jul 2015. We estimate the coal price recovery trend should sustain until 2018 when China fully implements its planned coal production cuts of 500m tonnes. As such, we maintain our BUY call and IDR20,900 TP (17% upside) on United Tractors due to its:

1. Recovering FY17 earnings;

2. Undemanding valuations.

♦ China’s coal production cuts are on track. As a result of China’s plans to cut domestic coal production by 500m tonnes in the next three years – recent data shows that coal production keeps showing lower monthly volumes since April (June’s coal production volume was down 15.6% to 277.5m tonnes) – we believe the lower production levels will result in:

i. Coal inventory continuing its decreasing trend;

ii. An increase in imported coal volume;

iii. A recovery in coal prices.

♦ China to import higher coal volume in the coming months. China booked flat imported coal volume in July (-0.2% YoY), which was mostly due to the high base effect in Jul 2015. We think its imported coal levels should keep increasing in the coming months for coal inventory restocking. This is as its inventory keeps declining. Indonesian coal holds the biggest share of China’s imported coal levels. Amongst the locally-listed coal firms, Adaro Energy Tbk PT (ADRO IJ, NR) and Indo Tambangraya Megah Tbk PT (ITMG IJ, NR) have quite sizable exports to China (Figure 5).

♦ Better 2H16 weather should improve mining contracting volume. Heavier-than-expected rainfall in 1H16 saw most of United Tractor’s PT Pamapersada Nusantara (Pamapersada) unit’s clients reaching stripping ratios that were lower than the planned FY16 ratio. The probability of La Nina happening in 2H16 is now lower than estimated in previous months and, even if it does develop, it will most likely be weaker than expected (Figures 6 & 7). Thus, we estimate Pamapersada’s stripping ratio and mining contracting volume to improve in 2H16 on the better weather expected.

♦ Reiterate BUY. We reiterate our BUY call DCF-based IDR20,900 TP, which implies 14x FY17F P/E. This is on United Tractors’ recovering earnings in FY17, which are still not fully reflected in its consensus numbers and share price in our view. Our FY17F EPS is 13.5% above consensus estimate. United Tractors is also currently trading at 12x FY17F P/E, which is below its 10-year mean of 14x. The firm is in a net cash position too and has good corporate governance. Key risks to our 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 vs the USD. (Hariyanto Wijaya, CFA, CPA)

Link to report: United Tractors : China’s Domestic Coal Production Cut Is On Track

Link to Daily report: Indonesia Morning Cuppa - 120816

Media Highlights:

Economics

Government to ban raw mineral exports

Government to cease capital injection for SOEs

Corporates

Blue Bird aims single digit growth

Blue Bird (BIRD IJ, BUY, TP:IDR7,500)) is aiming for a single digit growth of 5-10% for FY16 or IDR5.7-6trn of revenue target. Moreover, the company also reduces its capex allocation from IDR2trn to only IDR1.2trn for fleets’ maintenance. The company stated that it will fund its capex through its internal cash. (Kontan)

Comment:

We will review our topline and earnings growth for the company as we have not factored in:

1. The lower utilisation rates on the back of higher competition from the online ride applications

2. Lower tariff fare by 15% since April 2016

3. The regulation on online ride applications that has not been in favour to conventional taxis

However, in the long term, we continue to remain positive on Blue Bird as:

1. We expect an improvement in terms of average daily revenue on the back of 17% increase in per KM trariff since June 2016

2. We think that the odd even regulation could improve the utilisation rates of Blue Bird in 2H16

3. Based on our conversation with the new CFO yesterday, Blue Bird will finalise their agreement with Gojek which we expect the deal could help Blue Bird to improve the utilisation rates

4. Their new applications has shown improvement of order on daily basis. In June 2016, the order is at 7,400/day or increased by 50% since March 2016 of 4,900 orders/day. (David Hartono)

Wijaya Karya to inject capital to Wika Realty

State-owned contractor company Wijaya Karya (WIKA IJ, Neutral, TP: IDR2,665) plans to inject capital to its subsidiary which involve in property business, Wika Realty in the end of FY16. According to the company, the total amount still under calculation but the fund will be used for land clearing in transit of development (TOD) area in Walini, Bandung Regency with total land area reach 1,200ha. After that, Wika Realty plan to conductIPO shares in the end of 2016 or at the latest in 2017. (Bisnis Indonesia)

Comment: Wika realty will be the beneficiary of HST construction in the long run. The subsidiary will also join with other SOEs to develop property around HST stations. On the other hand, Wijaya Karya expects to obtain construction permit from ministry of transportation within this month. (Dony Gunawan)

Intiland offers six property projects in Surabaya

Summarecon recorded IDR1.9trn marketing sales

Graha Layar Prima raised IDR650bn from right issue

Modernland aim to sell 15ha industrial land

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