United Tractors, Dominates heavy movers, CLSA

As the dominant domestic player in both the heavy-equipment and mining-contracting sectors, United Tractors (UT) will benefit from rising coal demand. Mining remains its key sales driver, while we expect the new land bill to lead to a surge in demand for construction equipment from 2013. Production is gradually rising at its new coal assets, which also provides upside. The company generates more than 25% ROE and we estimate a 67% total shareholder return over 2012-14.


Strong Komatsu franchise
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, which is in line with UT and industry guidance. Mining will remain the main growth driver in the medium term, but demand for construction units should accelerate in 2013 after the land bill comes into effect. Low interest rates will support demand while competition in the small and medium segment will rise, but UT should maintain a leading market share at close to 50% on an expanding product line and leading aftersales service.

Mining-contracting growth
Pama, UT’s mining-contracting division, has a strong presence in Indonesia, with a 41% market share. Better weather resulted in higher coal production and 21% over-burden (OB) removal growth in 2011. We forecast a 10-12% increase in OB removal and coal production for 2012-13. Our assumption of a depreciating rupiah is positive for UT’s mining-contracting business.

Building up coal division
UT is in the process of finalising two more acquisitions in Kalimantan. We expect upside as production gradually ramps up from the new assets. Total coal-asset reserves are now 365m tonnes. Mining contributes 8% to UT’s profit and is set to rise to 10% in the next three to five years, while other businesses also look likely to grow strongly.

Valuation upside
UT’s business model ensures that each unit provide synergies across divisions. Mining is still the key growth driver for equipment sales, with upside from a potential surge in construction-machinery demand from next year. Generating strong ROE of 25% and ROIC of 27%, with 20% EPS Cagr and the potential for a rerating, we expect a 67% total shareholder return over three years.