United Tractors (UNTR IJ), 12M Target price Rp35,000

Research Today: United Tractors (UNTR IJ), dominates heavy movers by Sarina Lesmina

UNTR is one of our top picks. Stock has done well, up 30% over the last twelve months and 100x in the last decade! No wonder, the company continues to deliver day in and day out. Everybody knows UNTR’s great operational track record, good management and cashed-up balance sheet with over US$900m cash. And supply disruptions in the heavy equipment unit (due to Japanese tsunami) proved to be a good buying opportunity.

But what we like to focus on today is that UNTR is also nicely leveraged into the on-going construction boom. UNTR’s Komatsu sales has gone on a tear up 57% YoY in 2011, following a 74% YoY rise in 2010.

Little has been made of the re-emergence of the construction sector. Even though construction-related sales make up only 10% of total Komatsu sales (this used to be over half of total equipment sales prior to Asian Financial crisis), construction-related has been growing very fast. Construction-related equipment sales rose by 42% in 2011 and Sarina is forecasting stronger and stronger demand from this sector. Construction sales, together with coal will lead Komatsu sales in 2013.

UNTR is nicely positioned for this. Komatsu is already the leading player in the construction sector in Indonesia with 35% market share, followed by Caterpillar at 26% and Hitachi at 16%.

Makes sense. We have seen property developers marketing sales exploding in the last few years: sales grew by 60% and 55% in 2010-11. No signs of a slow down either. BCA, now the leading mortgage provider in a recent meeting with us indicated that the bank is poised to grow their mortgage book by 40% this year!!

Aggregate marketing sales of the 8 property developers under our coverage

We are seeing similar trends in the construction industry. One of sales top picks in construction is PTPP. This state-owned’s contracts rose by over 34% last year and will grow by over 30% this year. PTPP FY2011 results were released this morning and while revenue rose a respectable 41%, EBIT rose by a whopping 67%. This confirms the anecdotes we’ve lately been hearing - that Indonesian architects employed in Singapore are returning to Indonesia to set up their own architect company and that construction fees for buildings have already increased by 10% YTD.

To extend its already leading market share in the construction sector, Komatsu is extending its product line and maintaining comprehensive aftersales service in this segment. Komatsu Indonesia has increased production as well as expanded its capacity. BUY.

Key points from the report:
· After a strong 2011 that saw unit sales rise 57% YoY to 8,467 we forecast a 17% increase to 9,900 units in 2012.
· Mining will remain the main growth driver in the mid-term, but demand for construction units should accelerate in 2013.
· A more extensive product line and good aftersales services will help UT realise potential from the infrastructure boom.
· UT is developing a strategy to maintain its leading position (35% share) in the construction sector, such as extending its product line and maintaining comprehensive aftersales services.
· It will take time for new players such as Sany and Sumitomo (entering the small- to medium-sized segment) to establish a good distribution and aftersales network.
· Generating strong ROE of 25% and ROIC of 27%, with 20% EPS Cagr. We expect a 67% total shareholder return over 3 years.
· VALUATION: UNTR trades at 14.5x 12CL PE and 3.5x 12CL PB.

source: CLSA dated 12 March 2012