UNTR Downgrade, Early warning signs, YU

Our recent channel check reveals early signs of pressure in the heavy
equipment business from increasing competition. While we do not yet
see a major earnings downside risk at this stage, the generally riskier
environment warrants a valuation de-rating.

We cut our 2012-13 estimates by
5-6% on lower sales and margins.
Target price is lowered to Rp26,000
(based on lower target P/E of 11.6x,
-1SD from the 3-year mean) to reflect
the stock’s higher overall risk due to
increasing competition and exposure
to the softening coal price.
Downgrade from Neutral to
Underperform.




What Happened
We met with a key player in heavy
equipment leasing who indicated that
inventory levels for the
small/medium-sized key brands (e.g.
Komatsu, Caterpillar) are high with
waiting periods of 1-2 months
(shorter than the normal 3-4 months).
Amid the still-healthy demand from
the mining and construction sectors,
especially among small- and
medium-sized clients, availability of
supply appears to be the main culprit.
Recent reports of excess equipment
supply in China appear to support
this view. Also, UT’s management
said in last week’s conference call that
2012 will be a “challenging year” for
the heavy equipment market as
higher competition may put pressure
on margins.

What We Think
Although demand from expansion in
key sectors remains intact, we see our
channel check indicators as an early
warning sign for the sector. We are
maintaining our 2012 forecast for
UT’s heavy equipment sales (of 9,350
units, +10% yoy), but have cut the
margin projection for the business
and lowered its 2013 sales growth
outlook. We think further risk could
also come from the persistent
softness in coal price, which could
threaten coal miners’ margins and
expansion plans, and pose further
threat to the margins of UT’s own coal
mine.
What You Should Do
UT is currently trading at 14.3x
forward P/E, +0.9SD to the 3-year
average. We believe the risk of slower
earnings from its equipment business
and exposure in other businesses to
the coal price outlook has the
potential to disrupt its earnings
growth momentum. As such, the
stock warrants a valuation de-rating.

Download file : UNTR 08