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United Tractors (UNTR IJ) Summary

Core Content

United Tractors (UNTR IJ) is an Indonesian industrial company with a significant focus on coal mining and heavy equipment manufacturing. The company has been facing challenges due to the declining coal market, particularly in China, which has led to a reduction in its coal-related revenues and earnings. In response, UNTR is actively pursuing diversification strategies to reduce its overconcentration in coal and to explore new revenue streams in the construction sector, gold mining, and power plant projects.

Main Points

• Share Price and Target Price: The current share price is IDR19,000, with a target price of IDR20,000 (+5%). The market capitalization is USD5.2B, and the average daily trading volume is USD4M.
• Dividend Policy: UNTR maintains a consistent dividend payout ratio of approximately 34%, with a net dividend yield of around 2.9% for FY15. Management assures that dividend payouts will not be affected by asset impairment.
• Earnings and Impairment: UNTR is expected to report an asset impairment charge of IDR1t in 4Q15, which will bring its net profit to IDR6.7t for FY15. This is in line with the existing forecast of IDR6.6t.
• Sector Shift: The company is shifting its focus from coal to the construction sector due to the weak demand for coal. Construction is expected to provide a more stable and sustainable revenue source.
• Diversification Plans: UNTR plans to diversify into gold mining and power plant projects. It is also looking to expand its offerings in support products and services for heavy equipment, which have been growing at a rate of 6-7% YoY.
• Financial Performance:
  • Revenue: Expected to grow at a moderate pace, with FY15E at IDR53,808.7 billion.
  • EBITDA: Projected to remain relatively stable, with FY15E at IDR12,496.8 billion.
  • Core Net Profit: Expected to be IDR6,681.8 billion for FY15E, with a core P/E ratio of 10.5x.
  • ROAE and ROAA: These metrics have been declining, indicating a decrease in return on assets and equity.
• Risk Factors: The construction sector is considered riskier due to shorter project durations and higher price sensitivity. Additionally, the company lacks experience in gold mining, which could pose challenges.

Key Information

• Asset Impairment: Management has warned about mining impairment charges in 4Q15, which are estimated at IDR1t. This is part of a trend, following a charge of IDR2.7t in 4Q14.
• Coal Market Decline: Coal prices have dropped significantly, with a 39% decline since 2014, affecting both its mining operations and heavy equipment sales.
• Heavy Equipment Sales: Sales are expected to decline by 10% YoY in 2016 due to reduced demand from the mining sector.
• Gold and Power Plant Projects: These are seen as promising but may not provide immediate benefits due to the time required for exploration and regulatory uncertainties.
• Financial Ratios:
  • P/BV (Price to Book Value): Has been declining from 2.1x in FY13A to 1.5x in FY17E.
  • Core P/E: Ranges from 13.5x in FY13A to 11.6x in FY17E.
  • EV/EBITDA: Expected to remain around 4.2x in FY17E.
• Cash Flow: UNTR has a positive free cash flow, with a forecast of IDR6,764.5 billion for FY17E, but the company is cautious about the sustainability of its cash flow due to the ongoing challenges in the coal sector.

Conclusion

Despite the challenges in the coal sector, United Tractors is taking steps to diversify its operations and reduce its reliance on coal. However, the success of these new ventures is uncertain, and the company faces risks due to its lack of experience in gold and power plant sectors. The current valuation, with a core P/E of 10.5x, is considered reasonable, and the company's dividend policy remains stable. Overall, the company is in a transition phase, and investors should monitor its progress in the construction and new sectors closely.