RHB Indonesia Morning Cuppa - 29 August 2016- (United Tractors)

Good morning,

United Tractors: Mining Contracting Volumes Ahead Should Recover

After booking low overburden removal volumes in July due to the Lebaran holiday, we think the mining contracting volume should recover from August onwards considering:

1. No holidays at clients’ coal mining sites from August onwards;

2. Coal inventory levels at United Tractor’s clients’ stockpiles are already low;

3. China’s imports of Indonesian coal are increasing.

Maintain BUY and IDR20,900 TP (18% upside) as its earnings should recover from FY17 onwards and undemanding valuations. It is trading at 11.8x FY17F P/E vs its 10-year mean of 14x).

♦ Mining contracting volume should recover from August onwards. While unit PT Pamapersada Nusantara (Pamapersada) booked low volumes in July, we estimate its overburden removal volume should recover ahead. This is as there are no holidays at its clients’ coal mining sites in the coming months (vs the 2-3 days for Lebaran in July, coal inventory levels at its clients’ stockpiles are low (Figure 1) and China’s Indonesian coal imports are on the rise.

♦ China’s Indonesian coal imports increased by 10.2% YoY in 7M16 due to decreasing coal inventory levels in China as a result of the Chinese Government’s policy to cut domestic coal production. As a result, China’s Indonesian coal imports has started to book positive YoY growth since 6M16 and kept increasing to 10.2% YoY in 7M16 (Figure 4). We estimate China’s Indonesian coal imports should keep growing as its coal inventory levels keep decreasing, which will indirectly benefit United Tractors going forward.

♦ Maintain BUY and IDR20,900 TP. We reiterate our BUY call on United Tractors as we think its earnings should recover from FY17 onwards from its mining contracting and coal sales businesses. This will be due to a recovery in coal prices as well as its undemanding valuations. The stock is currently trading at 11.8x FY17F P/E vs its 10-year mean of 14x.

♦ Risks to our call are a significant change in the Chinese Government’s policy in cutting domestic coal production by 500m tonnes in the next three years, weaker-than-expected coal demand and a significant strengthening of the IDR.

♦ Mixed performance in July’s operational statistics. United Tractors booked 175 units of Komatsu sales in July (+27.7% YoY, +4.2% MoM). Sales to the construction sector were the main driver of the higher numbers. We think increasing sales to this sector should continue until FY17. This is as the Government is keeping infrastructure as one of its main focus in FY17. Meanwhile, Pamapersada booked lower mining contracting volumes in July (July’s overburden removal: -7.1% MoM, -17.4% YoY). This was because there were up to 2-3 days off to celebrate Lebaran at its clients’ coal mining sites that month. Meanwhile, its coal sales are back to the 500,000 tonnes level in July. This is on falling river water levels. Rivers are its main transportation mode. (Hariyanto Wijaya CFA, CFP, CA, CPA)

Link to report: to be sent out later

Link to Daily report: Indonesia Morning Cuppa - 290816

Media Highlights:

Economics

Bank Indonesia predicts deflation in August

Corporates

Astra Agro Lestari to enter cattle fattening business

Astra Agro Lestari (AALI IJ, NEUTRAL, TP: IDR16,000) has entered cattle fattening business since June 2016. The company plans to have 2,060 cattle breeders in FY16 and will import 5,000 cattles for the fattening process. The company has imported 2,000 cattles in June 2016. For initial investment in cattle business, Astra Agro Lestari allocates capital expenditure of IDR75bn. (Bisnis Indonesia)

Comment: In our view, Astra Agro Lestari’s foray to cattle business may not be positive because Astra Agro Lestari deviates from its core business in palm oil. The size of cattle business is still very small compare to current palm oil business. (Hariyanto Wijaya)

Japfa sold farm in Australia

Japfa Comfeed Indonesia (JPFA IJ, BUY, TP: IDR1,150) recently sold its cattle farm in Riveren and Inverway, Australia, to Lavington. The proceeds from the affiliated transaction on Friday (26/8) will be use to increase the company’s investment in local farms’ breeding. However, the company has signed a non-disclosure agreement and will only announce the transaction value after three months of the transaction. (Bisnis Indonesia)

Comment:We estimate the sales value to be USD60m, these farms were held under Japfa Santori Australia, wholly owned subsidiary of Japfa Comfeed. (Norman Choong)

PP targets IDR3trn from EPC

Pembangunan Perumahan (PTPP IJ, BUY, TP: IDR5,400) is aiming to receive IDR2.5-3trn from its engineering, procurement and construction (EPC) business this year. The target is 1.7x-2.2x last year’s target of only IDR924bn. The optimism is due to the company’s current contract achievement to worth on 500MW construction projects in 9 locations worth IDR1.9trn. (Kontan)

Comment: It is stronger than our initial expectation of only IDR2trn revenue in EPC this year. We estimate IDR2.4trn revenue from EPC works as PTPP aims to have up to 4,000MW power plant projects next year. (Dony Gunawan)

Bank Mandiri to issue IDR1trn asset backed securities

Cikarang Listrindo to partner with General Electric

Kino Indonesia realised IDR112.92bn capex

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