RHB Indonesia - United Tractors - Mining Equipment Sales To Stay Robust (United Tractors, Economics) Unknown Selasa, 26 September 2017




Good morning,

United Tractors – Mining Equipment Sales To Stay Robust

We expect United Tractors to continue booking strong mining heavy equipment sales in the months ahead, as the replacement cycle and expansion in coal mining contracting capacity should boost demand for such equipment until 2019. The company sold 350 units (+101% YoY, +13% MoM) of heavy equipment last month. This made August the highest month of its heavy equipment sales since Apr 2014. On top of that, our discussion with its management leads us to expect its contracting volume to trend higher over the remainder of the year. This is because rainfall at its clients’ mine sites has declined since September – a boon for its mining contracting business. Thus, we reiterate our BUY call and TP of IDR35,600 (18% upside), as we think the consensus still has not fully factored in the sizeable growth of the company’s mining heavy equipment sales for FY18F-19F. Our FY18F EPS is 12.8% higher than that of the consensus.


¨ Strong mining heavy equipment sales to continue. United Tractors sold 350 units of heavy equipment in August (+101% YoY, +13% MoM), making it the month with the highest total for Komatsu equipment sales since Apr 2014. The main sales growth driver was the increase in its mining heavy equipment sales – it sold 179 units of these (+346% YoY, +20% MoM) during the month. We expect its strong mining heavy equipment sales to continue until 2019, as we think it is still at the beginning of the upcycle in mining heavy equipment sales. The upcycle, in turn, stems from the replacement cycle (which started in 2017) following the sales boom for mining heavy equipment in 2010-2012; as well as the increase in the demand for such equipment due to the expansion in coal mining contracting capacity. The Indonesian Government expects 2017 domestic coal production to reach 477m tonnes (+4.6% YoY from FY16’s realisation of 456m tonnes) – the highest domestic coal production level in history.
¨ Mining contracting volume should trend higher in the remainder of the year. United Tractors booked decent mining contracting volume in August. Amid high rainfall during the month, it recorded an overburden removal of 75m Bank Cubic Metres (BCM) (+12% YoY, +1% MoM) and coal production of 10.3m tonnes (+1% YoY, +6% MoM). We think its mining contracting volume should trend higher in the remainder of the year – based on our discussion with company representatives – as rainfall at its clients’ mine sites has decreased this month.
¨ Maintain BUY. Our unchanged DCF-derived TP also implies 15.1x and 13.2x P/Es on FY18F-19F EPS respectively. Maintain BUY, as we think the consensus still has not fully factored in the sizeable growth of United Tractors’ mining heavy equipment sales for FY18F-19F. Our FY18F EPS is 12.8% higher than the consensus’. A consensus earnings estimate upgrade would be a share price catalyst. (Hariyanto Wijaya, CFA, CPA, CMT)

Link to daily report: Indonesia Morning Cuppa 260917

Economics Update:

BI Cuts Key Policy Rate Further In September
As expected, Bank Indonesia’s (BI) board of governors cut the 7-day (reverse) repo rate – the benchmark policy rate – for the second time this year, by 25bps to 4.25% on 22 Sep. As external risks linger and the BI has front-loaded its interest rate cut, which are already low enough, we believe the Central Bank would maintain its key policy rate unchanged for the rest of 2017, and in 2018.
¨ Deposit facility and lending rates were also cut to 3.5% and 5.0% respectively. BI believes that there was room for further monetary policy easing, as inflation remains low in 2017, and is projected to stay low during 2018-2019, below the mid-range of the target, while the current account deficit is under control within an acceptable range.
The policy rate easing is expected to support ongoing improvements in banking intermediation and domestic economic recovery. External risks, specifically relating to the US Federal Reserve’s (Fed) hiking its Fed Funds Rate (FFR) and unwinding its balance sheet, are consistent with market expectations, making domestic interest rates in Indonesia attractive, vs external interest rates in developed countries.
¨ BI sees Indonesia’s economy improving in 3Q17, in several sectors. There would be an improvement in domestic demand, especially household consumption, as reflected in the improvement in retail and durable goods sales. Robust building investment is expected to persist, in line with government infrastructure spending plan. Non-building investment is also expected to improve, particularly in the commodity-based export industry, amid steady commodity prices.
By sector, improvements, although weak, began to show in the trade sector. The manufacturing sector is also expected to improve, especially those related to export activities, such as other transport equipment, chemicals and pharmaceuticals.
¨ Going forward, we believe inflation would likely trend up to 4% in 2017 (2016: +3.5%), but would remain manageable. This would be due to higher fuel prices and stronger domestic demand. In addition, the current account deficit in the balance of payments is likely to be contained, although the IDR may continue to face external headwinds. This is on the back of expectations of further US interest rate hikes.
Overall, we are of the view that moderate inflationary pressure, the recent deregulation of government policies, successful implementation of the tax amnesty bill, and BI’s monetary easing would likely boost consumption and private investment, moving forward.
¨ BI expects the global economy to keep improving, supported by gains in the US, Europe, China and other emerging markets, while commodity prices are set to remain high – albeit with several risks that require vigilance. As global economic growth improved, world trade volume also showed increases.
¨ The Indonesian financial system remains stable, underpinned by a resilient banking system and relatively sound financial markets. In July, the CAR for banks remained high at 23%. This is above the minimum threshold of 8%.
NPLs remained stable at 3% (gross) or 1.4% (net). Deposit growth moderated to 9.7% in July from 10.3% in the previous month, due mainly to decreasing forex deposit. However, loan growth picked up to 8.2% in July, up from +7.8% in June. This was mainly due to higher credit in the building, electricity, services and agriculture sectors. Although improving, loan growth remained soft as banking intermediation has not shown much signs of improvement.
To support economic funding as well as financial market deepening, BI will speed up the consolidation process in the banking sector while promoting credit distribution and corporate funding through financial markets. (Rizki Fajar)

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Best regards,

Andrey Wijaya
Senior Vice President
Research Analyst – Auto, Consumer, Cement
PT RHB Sekuritas Indonesia
 ​

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