Prasetya Gunadi, Pandu Anugrah | BCA Sekuritas

Tough challenges for heavy-duty equipment

We adjust our projection for UNTR heavy equipment sales in 2019F downward, to 4,000 units (-16% YoY), vs. a previous 4,900, as certain UNTR mining sector customers, particularly small-call miners producing mid-to-low CV, have decided to review and may postpone expansion plans. We are thus conservative and exclude all the wait-and-see customers as potential buyers; this translates into ~5% lower 2019 UNTR earnings. However, the growth for spare part and maintenance services is expected to reach ~15% YoY, as coal miners still require spare parts for their existing fleets to continue with their production.

The cost squeeze is on

Total PAMA OB removal in 2018 is estimated to reach 970-980m bcm (+21% YoY), above our forecast of 960m bcm. However, we expect the QoQ PAMA gross margin to drop slightly, to 18% vs. 20% in 3Q18, on the back of 4Q18 rainfall that was heavier than in the previous quarter. We expect PAMA to maintain coal production level at ~126m tons (+0% YoY) in 2019; against this, several low CV clients are considering a cut in their SR ratio to an average of 7.5x vs. 7.8x in 2018; they are also requesting a cash discount for mining fees, as low-rank coal prices remained subdued. Even though this is still in discussion, we are being conservative and reduce our previous OB removal production target from 965mn bcm to 947m bcm in 2019F; we also assume that PAMA will give a 4-5%) discount to its low-CV coal clients, ~30% of total PAMA production.

Infrastructure & Gold drive hopes

It is worth noting that ACST’s 2019 new contract target will jump to IDR15tn, (+830% YoY), from IDR1.6tn new contract in 2018, as the results of the tender offering, they were involved in have been delayed to this year. UNTR’s mining operations, under TTA Group, targets around 9mt of coal of sales, including 1.5mt coking coal (+15% YoY). Also, with the December 2018 acquisition of Martabe Gold Mine, UNTR looks to contribution of 360k ounces of gold sales in 2019, which should lift 2019F earnings by 6.2% YoY, as gold will contribute around 11%-12% of total earnings in 2019F with higher margins.

Recommendation: Reiterate BUY with lower TP of IDR35,000

While we lowered our TP to IDR35k, we maintain our BUY rating on UNTR, as 23.3% share price correction since Nov-18 is overdone and suggest room for accumulation. Our USD90/Mt coal price assumption still translates to 6% earnings growth ahead. However, in term of valuation (PE and EV/EBITDA), it has come off to –1.5sd-2.0sd, a historical low, even lower than the bleak period of 2015-2016, when coal price was below USD60/ton with annual heavy equipment sales of only 2.2k units. Given its strong balance sheet, 5.8% dividend yield in 2019F, and strong cash flow generation, UNTR deserves higher multiples.

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