United Tractors TP30,000

● We assume coverage of UNTR with OUTPERFORM and a target price of Rp30,000. We expect abundant positive catalysts for UNTR in the short term, as well as long-term growth drivers. For more details, see our full report, Catalysts rich.
● Catalysts that appear within reach: (1) supply risks appear manageable and we expect 2011E construction machinery sales to jump 41% YoY, likely above market expectations; (2) subsiding weather risks imply better outlook for the mining contracting segment in 2011E than 2010A and (3) rights issue completion provides UNTR with strong capacity to fund future growth.
● Long-term growth drivers: First, UNTR is well positioned to benefit from Indonesia’s potentially higher investments ahead. And second, UNTR’s mining contracting business is well positioned to benefit from the potentially higher coal demand from India.
● We recognise UNTR is not trading at a discount to peers and is at the higher end of its historical trading range, though not at the peak. But, we believe UNTR’s valuations are justified.

Abundant catalysts
We assume coverage of UNTR with OUTPERFORM and Rp30000 target price. We foresee abundant positive catalysts for UNTR in the short term, as well as long-term growth drivers.

Catalysts within reach
In the recent past, UNTR has underperformed largely due to: (1)supply risks after the Japan tsunami, (2) weather risks curbing its mining contracting performance in 2010A and (3) rights issue announcements. But now we expect UNTR to trump this series of events with a positive short-term outlook, as: (1) supply risks look to
be manageable and we expect 2011E construction machinery sales to jump 41% YoY, likely above market expectations; (2) subsiding weather risks imply better outlook for mining contracting segment in 2011E than 2010A and (3) rights issue completion provides UNTR with strong capacity to fund future growth.

Long-term growth drivers
First, UNTR is well positioned to benefit from Indonesia’s potentially higher investments ahead. In 1996, when Indonesia’s investment to GDP ratio was significantly higher than what it is presently, UNTR sold 1163 units of construction machines, more than double the 577 units sold in 2010A. Thus, we expect significant upside potential for UNTR’s construction machine sales if Indonesia moves into higher investment phase. Second, UNTR’s mining contracting business looks well
positioned to benefit from potentially higher coal demand from India.

Deserves its valuations
We recognise that UNTR is not trading at a discount to peers and is at the higher end of its historical trading range, though not at the peak. However, we believe its valuations are justified given: (1) abundant positive catalysts and (2) potential for UNTR to transform from currently a commodity focused name to a stock that will allow investors to leverage and diversify across the two most attractive stories of Indonesia, namely higher investment and higher coal demand from India.

source: CreditSuisse dated 22 June 2011