United Tractors No Surprises
UNTR posted 1Q13 revenue of IDR12.5trn (+5% q-o-q, -17% y-o-y, 24% of our FY13E) and net income ofIDR1.1trn (-14% q-o-q, -26% y-o-y, 23% FY13E) in line with our expectations. Increased sales efforts at the construction machinery division and declining ASPs in the coal mining segment squeezed the group’s margin. Meanwhile, Pama’s market leadership and contracted work nature are a saving grace. Maintain NEUTRAL, with IDR 19,700 TP.
Margin crunch on increased sales efforts, soft coal prices
Non-pricing sales strategy such as additional warranty coverage and complimentary spare-parts giveaways depressed gross margins for the construction machinery division (down to 16.4% in 1Q13 from 1Q12’s 17.6%). Lower ASPs at PMM & TTA led to slim bottom-line (at 1.5% in 1Q13 versus 14.9% in 1Q12).
Q-o-q improvement should be seen as northern winter bequest
With coal futures at their lowest levels since 2009, it may be too early to hold a positive outlook from a 70% rebound in Komatsu’s unit sales q-o-q. The road continues to be bumpy for the construction machinery and coal mining divisions.
Pama a saving grace to group’s earnings
Pama booked IDR7.08trn revenue in 1Q13, up 19% y-o-y from IDR5.97trn in 1Q12, accounting for 57% of UNTR’s consolidated top-line. Higher 1Q13 production volume (up 12% y-o-y based on contracts) as well as better weather and favorable exchange rate (ie IDR depreciation on the USD-derived top-line) boosted Pama’s gross margin to 15.5% (up from 12.3% last year). Pama’s market leadership and efficiency (it produces 70% of national coal production) helped it to see capture new relationships, notably at Arutmin and Berau.
Maintain NEUTRAL, TP: IDR19,700
We expect the company to have at least a stable outlook in the foreseeable future in view of Pama’s contractual obligations (now the majority of its revenue source). The company is trading at a 14.0x 2013P/E – at par with its valuation before the commodity boom.
Results in line with estimates, no surprises
United Tractors (UNTR) posted IDR12.5trn in revenue, up 5% q-o-q but down 17% y-o-y
The top-line accounted for 24% of our FY13 estimates, and in line with UNTR’s 1Q revenue booking pattern of 24% in the previous years. Net profits came in at IDR1.1trn, down 14% q-o-q and 26% y-o-y. Cost of revenue again outpaced revenue growth, which has been the trend for the past three quarters since the commodity slump in 2H12.
UNTR has largely avoided the industry price war as an effort to maintain the resell value of its premium heavy machineries. Instead, it used non-pricing strategies such as additional coverage under the warranty scheme and complimentary spare-parts giveaways – items which are booked under cost of revenues. UNTR has also increased sales efforts through augmented commission schemes for its sales team, of which costs are booked under selling expenses (32% of our FY13 estimates, around 9%-10% higher than historical seasonal numbers). Another margin squeeze occurred at coal mining subsidiaries PMM & TTA, where lower ASPs led to slim bottom-line (at 1.5% in 1Q13 versus 14.9% in 1Q12).
As expected, UNTR has crossed over to become mainly a mining contracting company with Pama contributing 57% to the top-line. Higher coal production volume and favorable weather had supported Pama’s performance in 1Q13. Unlike coal mining, which is adversely impacted by weakening IDR, favorable exchange rate translated to a 15.5% gross margin for Pama – up from last year’s 12.3%.There were generally no surprises to these numbers as they arrived at par with our estimates. We maintain a NEUTRAL call on UNTR at IDR19,700 TP.
Pama’s contacts a saving grace as coal pricescontinue to decline
As expected, Pama, which posted a 19% topline growth y-o-y, emerged as UNTR’s main revenue source at 57% of op-line YTD. In yesteryear, Pama booked 40% of UNTR’s top-line. Note that UNTR has indicated that almost 90% of Komatsu’s revenue to the mining clients is usually derived from Pama’s capital expenditure, which was decidedly cut by 60% to USD200m this year. As a result, the construction machinery division’s top-line plunged 42% and contributed a mere 29% to consolidated revenue.
PMM and TTA mines posted a 36% revenue decline despite a mere 16% downturn in coal production, as average selling prices (ASPs) for coal fell from IDR1.2m/tonne in 1Q12 to IDR1.0m/tonne in 1Q13. Coal prices are expected to drop further going forward despite seasonal improvements in spot prices, which was largely caused by the northern winter in 1Q13. Futures prices have declined to the lowest level in three years and hitting numbers last seen in pre-commodity boom 2009. This shows that the demand for heavy machinery would continue to be soft in the coming months and coal mining revenue would remain depressed in the foreseeable future.
Construction Machinery showed seasonal improvement in 1Q13, but the battle for market share rages on Komatsu sales were booked at 451 units in March, bringing the total 1Q13 sales to 1,272 units – down 42% y-o-y but generally in line with the company’s estimate of 5,000 target units this year. While the 53% y-o-y decline in mining client sales clearly came from Pama’s capex reduction, sales to healthy sectors such as construction also declined by 37%.
This shows that the tightening competition is unfavorable to Komatsu’s premium pricing. Komatsu’s 70% sales rebound (in unit terms) compared to the previous quarter is too early to be seen as a positive indicator for FY13 as coal prices continue to decline. In 1Q13, heavy equipment market tended to show a seasonal improvement compared to 4Q12 as companies geared up for the New Year and coal prices improved due to northern winter. Total unit sales in the market fell 41% to 2,959 units in 1Q13, compared to 5,010 units last year. Komatsu maintains a 43% market share (at par with last year’s 44%), followed by Hitachi (HEXA IJ, BUY, TP IDR8,000) at 23% and Caterpillar at 16%.
Revenue from spare parts and maintenance services arrived at IDR1.22trn, down 14% from the previous year but now accounts for 30% of the total Construction Machinery division’s top-line (compared with last year’s 19%). Gross profit margin from the Construction Machinery segment declined to 16.4% in 1Q13, down from 17.6% in 1Q12. UNTR has intensified non-pricing strategies through spare parts giveaway and maintenance support, which were booked as cost of revenues. Consolidated sales and general expenses were slightly higher than our estimates based on previous years’ patterns. Higher commission to salespeople was booked under sales expenses.
Estimates a tad too sanguine in light of Pama’s 1Q13 operational data, but upside potential imminent on Pama’s market leadership. Pama booked IDR7.08trn revenue in 1Q13, up 19% y-o-y from IDR5.97trn in 1Q12, and accounted for 57% of UNTR’s consolidated top-line. Higher production volume in 1Q13 (up 12% y-o-y based on contracts), as well as better weather and favorable exchange rate (ie. IDR depreciation on the USD-derived top-line) boosted Pama’s gross margin to 15.5% (up from 12.3% last year). Pama digged some 23.7m tonnes of coal in 1Q13, up by 12% y-o-y mostly due to its contracted work nature.
However, the overburden removal declined in proportion to production at 199.3bcm – putting 1Q13 stripping ratio at 8.4x, down from 9.1x last year. UNTR expects Pama’s production to remain flat this year (around 94m tonnes), while we expect some 5% growth in view of a stable uptrend in Pama’s production in 2H12 despite the commodity bust. The company has targeted for a flat coal production with 805bcm overburden removal (OB down by 6% y-o-y). The latter translates to 8.6x-8.7x stripping ratio average and at par with our assumption, but rather sanguine compared to 1Q13 operational results.
We will have to revisit our assumption as the year proceeds. Meanwhile, we continue to see upside potential for Pama as the company’s best-in-class practices continue to attract tenders. Pama has recently backed out despite winning Berau Coal’s tender due to its risk aversion to the necessary capex. Even so, Pama has recently added Arutmin to its portfolio. Note that Berau and Arutmin sites have previously seen a territory of Buma (DOID, Not Rated), the second largest mining contractor in the market. Pama’s production accounts for ~70% of Indonesia’s national coal production.
March production indicates somber outlook as northern winter subsides in 2Q13
PMM’s and TTA’s production showed a 23% decline y-o-y (from 1.53m tones in 1Q12 to 1.17m tonnes in 1Q13). A decline in ASP resulted to the segment’s 37% revenue decline y-o-y, from IDR1.82trn to IDR1.18trn. PMM and TTA are especially sensitive to declining coal prices as they have one of the highest cash costs for any coal producers in Indonesia (at USD70-75/ tonne) due to its high caloric value production (at ~6,700 kcal/kg GAR) and difficult terrains in Central Kalimantan (11x stripping ratio).
Gross profit margin is therefore a slim 1.5% (from last year’s 14.9%). PMM and TTA produced 326k tonnes in March, down 20% m-o-m. Therefore, we are justified in our anxiety that that the first two months’ jump was merely caused by the northern winter seasonality. We have noted on our FY12 results review report that PMM’s and TTA’s productions are directly correlated to but trailed spot coal price movement by one month. We tried to be sanguine in our FY12 review but so far, the futures prices are evidently not well.
Around 70%-80% of production from the mining subsidiaries is contracted month-by-month (unlike Pama’s long-term contracts), so we may see their production pattern as a direct reflection of the current futures prices in the coming months. We built in a 5% growth in the coal mining division’s production volume, but may have to cut it down to UNTR’s target at 5.5m tonnes (flat compared to FY12).
Maintain NEUTRAL,TP: IDR19,700.
All in all, there are no surprises from UNTR’s 1Q13 results, but the company, at the very least, will have a stable outlook in the foreseeable future on the back of Pama’s contractual obligations (now the majority of its revenue source). We are maintaining our NEUTRAL call at IDR19,700 TP. The company is trading at a 14.0x 2013P/E – at par with its valuation before the commodity boom.
