United Tractors On Firm Ground

WHAT’S BREWING?

UNTR has been reported to submit two proposals to the state power company PLN for a 2x600MW and a 600MW power plant in South Sumatera (dubbed as PLTU Sumsel IX & X). The plants to be developed are the so-called “mine-mode”s, where the power generator itself is located at the coal mining site and subsequently distributed to the end user. This type of power plant is different from the regular Independent Power Plant (IPP) proposals in Indonesia, where the power source and the power generator are generally located in separate areas hence incurring transportation costs to and fro.

The proposal was submitted along with UNTR’s consortium partners, state-owned coal mining company PT Tambang Batubara Bukit Asam Tbk (PTBA) and India’s Lanco Infratech. PTBA is expected to take up 51% equity stake for the projects, while Lanco and UNTR are expected to take up 25% and 24% stake respectively. UNTR is flexing its Pama arm for this bid, where Pama would conduct mining contracting activities at PTBA’s low caloric value (CV) mines. EPC expert Lanco would subsequently utilize the produce for a steam-power operation at the plants. The projects are to utilize 30% equity fund from the investment consortium.

OUR TAKE

Followers of this news has been speculating if UNTR is trying to kill two birds with one stone that is, increasing Pama’s utilization by engaging PMM & TTA (UNTR’s mines) for power-plant coal production. We think that this sanguine interpretation is erroneous for three reasons: i) UNTR’s mines generally produce high CV coals, which is more feasible for exports, ii) UNTR’s mines are located mainly in Central Kalimantan, where the population surrounding its mines are sparse and dictates for the project to be deemed economically unfeasible and iii) UNTR has previously submitted a bid without a government-related partner to no avail.

In short, this power plant scenario will not be an escape for Pama and the UNTR mines from the world coal downturn. Additionally, the total 18,000MW projects would require 10m-12m tonnes of coal every year, which is only ~11% of Pama’s total ~90m tonnes of production this year. Yet, should UNTR won the projects for a standard 25-year concession, Pama would be indirectly guaranteed 250-300m tonnes worth of mining contracting work over the concession’s lifetime. We expect the project winner to be announced in mid-FY13, which puts the power plant into full operations earliest by FY16.

We are delighted once again to see the management’s thoughtful strategy, which is the key to UNTR’s dominance within the Indonesian market. Yet, the upside potential of this particular strategic move is still far and uncertain pending the proposal outcome and FY16 operations. We are keeping our forecasts intact and maintaining our IDR19,700 TP. HEXA is currently trading at 13.2x and 10.1x on 2012e and 2013f earnings respectively.