United Tractor (UNTR) - PROMOSING FUTURE BUSINESS

In spite of the Komatsu sales volume decline by 28% YoY to 3,111units (FY09) the total consolidated income of UNTR still posted significant increase from IDR 27.90tn (FY08) to IDR 29.24tn (FY09) or equal to 4.80% YoY growth. The achievement was around 1.43% below our last year forecasts of IDR 29.66tn (FY09F). The huge drop of company's net revenue growth by 48.8% YoY, from around 53.60% (FY08) to only 4.80% (FY09) appeared do not significantly affecting UNTR's gross profit performance. Helped by the lower cost of revenue composition from around 80.29% (FY08) to 77.19% (FY09), the company's gross income climbed by 21.31% YoY to IDR 6.67tn (FY09).Following numerous efforts to reduce both the selling and general administration expenses, it had also brought UNTR to record strong Profit and Loss (P&L) and driven the operating income up by 24.29% YoY from IDR 4.15tn (FY08) to IDR 5.16tn (FY09). On the back of declining interest expenses from IDR 283.12tn (FY08) to IDR 188.47tn (FY09) and gain on foreign exchange of IDR 283.11tn (FY09) from a loss on foreign exchange of IDR 234.17tn (FY08) resulting UNTR's earning before tax jumped by 41.34% YoY to IDR 5.44tn (FY09). Despite the fact that the construction machinery business growth declined by 3.37% YoY, the increasing productivity from mining contracting business and the additional operating revenue of IDR 266.37tn (FY09) had helped company to book higher bottom line result from IDR 2.66tn (FY08) to IDR 3.81tn (FY09) or grew by 43.48% YoY.

In terms of segmentation performance, in the same period of full fiscal year of 2009, mining contracting was becoming the major revenue driver. In the same period, the division posted a higher contribution to UNTR's total consolidated revenue from 41.64% (FY08) to 52.73% (FY09) or equal to an increase from IDR 11.61tn (FY08) to IDR 15.41tn (FY09). The construction machinery as another company's revenue driver in the same period which it showed weaker performance or dropped by 3.37% YoY from IDR 17.00tn (FY08) to IDR 16.43tn (FY09), while company's mining business line declined deeper by 27.41% YoY from IDR
3.91tn (FY08) to IDR 2.84tn (FY09). The lower coal sold which was provided by Dasa Eka Jasatama (DEJ) mines from 3.7million tons (FY08) to 2.4million tons (FY09) was due to lower demand from coal export market. It was impacted by the global crisis which is believed to be the main reason behind the decline of the division revenue.Nevertheless the positive outlook which is supported by the potential of sustainable growth of domestic economy as well as stabilizing inflation and foreign exchange, it should become several factors that could potentially trigger a significant increase of demand. Moreover, UNTR's second mines Tuah Turangga Agung (TTA) that has been started its (trial) production last years, should also help company's mining division to post a higher performance by the end of this year. According to the internal management, the mines will start its full commercially operated in the first half of this year.

As of March 2010, UNTR' continued to maintain its performance. Supported with a higher mining construction machinery demand, the total Komatsu YTD (3 months) sales jumped by 93.94% YoY to 1.218units (3M10) compared to the same period of last year of 628unit (3M09). Mining sector still becomes the highest contributor to the construction machinery division performance. In the same period, mining posted around 697units (3M10) or increased 52.85% YoY, while Agro sector recorded a higher growth of 284.28% YoY from 70units (3M09) to
269units (3M10). In terms of month on month (MoM) result, mining and agro sectors continue to become the division revenue driver. Mining sector noted 91units higher to 485units (Mar10) and the agro sector increased by 8.73% YoY to 112units (Mar10) from around 103units (Feb10), while the remaining additional of 99units (Mar10) contributed from forestry sector and construction sector of 49units (Mar10) and 50units (Mar10), respectively.Mining contracting as company's another business line also showing a better performance. Company's coal production climbed to 18.6mn tons (3M10) vs 14.6mn tons (3M09), while overburden removal rose from 121mn bcm (3M09) to 153.8mn bcm (3M10). The DEJ mines also give significant improvement to the overall result. As of 3M10 the coal sales volume grew by 7.51% YoY to 744.000tons (3M10) compared to same period last year of 692.000tons (3M09). In terms of MoM performance, DEJ booked around 261.000tons (March10) vs 251.000tons (Feb10).

Supported with the sustainable increasing demand from construction machinery and company's mining business, the internal management targeted the fiscal year 2010 sales to reach IDR 33.62tn or equal to a growth rate of approximately 14.97% YoY . Mining contracting business is expected to become the revenue engine for this year or estimated to contribute around 60% to total UNTR's revenue.The prediction is slightly above our forecast of around IDR 16.72tn (FY10F) or equal to 52.19% of the total company's consolidated sales.

On the construction machinery business, the division is also expected to continue in maintaining its performance. We projected that the division could potentially record around 6.5% growth YoY to IDR 17.50tn (FY10F), bring the total consolidated revenue to potentially reach IDR 32.05tn (FY10F). The major revenue engine remain expected to contribute from mining sector (55%), while the remaining 45% will be coming from agro sector (22%), construction (14%) and forestry (9%), respectively.In terms of sales volume, the company is expected to record around 4.000units (FY10F) or climbed by 29.03% YoY from 3.111units (FY09). To support achieving the target, UNTR has launched a new excavator model of PC 200-8, PC 400-8 and PC 130-8 series. The PC 200-8 is expected to record 1.600unit of sales by the end of this year, or equal to around 30% from the total target of company's construction machinery division. With those new series, the company projected to maintain its market share at around 47%.

With the continuing effort to maintain its division performance, we continue to give our positive outlook to company's business prospect in the future. Helped by the potential increasing demand from construction machinery division should become one of the major catalysts that could help the total consolidated revenue to continue in posting a higher growth. The potential higher coal prices for this year compared to last year should also support UNTR's coal business to get significant benefit and record improving revenue. Although, of parts and services business is not become company's meaningful revenue machine in the past years, we still judge that in the near future the division could potentially experiencing a significant growth and increasing its contribution to UNTR's consolidated revenue. We also include the company's plan to acquire two mining companies in the middle of this year as our assumption for FY10 growth. Using Discounted Cash Flow Method with the terminal value growth assumption of 1% we found that UNTR's share should be traded between IDR 20.372 - IDR 21.203. Over the counter UNTR shares traded at IDR 18.350 or equal to a PE ratio of 15.72x or below the industry average of 21.23x. We continue to maintain BUY recommendation with target price of IDR 22.500 per share or around 22.61% potential upside from its current price of IDR 18.350 per share, as of May 14th, 2010.

Better profit in 1Q10 due to performance improvement

KIJA posted significant improvement in sales and service revenue by 103.4% yoy to Rp158.5 billion in 1Q10. The increase was mainly because of two factors. The first, is from electricity power revenue of Rp45.8 billion in 1Q10 compared to nothing in 1Q09. This is due to operation of gas power station at the end of 2009A. The second is KIJA recorded land sale of Rp25.9 billion in 1Q10 compared to nothing in 1Q09. But the cost of goods sold and service revenue jumped dramatically by 172.3% yoy to Rp100.5 billion. The cost for gas power station exceeded its revenue, mainly due to the depreciation cost. The revenue from the power station was not in full operation. The operating expenses increased by 59.1% yoy to Rp31.2 billion in 1Q10, thus the operating profit increased significantly by 26.9% yoy to Rp22.25 billion in 1Q10. Out of operating performance KIJA was benefited mostly by three factors. The first is, KIJA recorded forex gain of Rp18.1 billion in 1Q10 compared to forex loss of Rp44 billion in 1Q09. The other is, KIJA recorded gain of fixed asset disposals of Rp6.8 billion in 1Q10 compared to nothing in 1Q09. And the third one is, the interest expense declined by 36% yoy to Rp22.6 billion in 1Q10. Thus, KIJA was able to post net profit of Rp24.6 billion in 1Q10 compared to net loss of Rp59.7 billion in 1Q09.

KIJA is developing gas power station with total capacity of 130 MW. The objective is to give electricity supply sustainable without any interruption to its commercial clients. The station will be equipped by two gas turbines with one combined cycle. KIJA expects that the power station will be completed in 3Q10. The gas supply will be provided by PT Perusahaan Gas Negara (Persero) Tbk. and PT Bayu Buana Gemilang, a subsidiary of a state owned company, Pertamina (Persero). KIJA already commissioned the operation at the end of 2009 although not in full capacity.The power station existence will be good for the company's future performance. Revenue contribution will be very significant since it is a strong demand in the market. In 1Q10 the contribution was 28% of total revenue. The figure will be higher along with the fully operation of the gas power station. On the other hand, the power station will be an attractive point for the industrial customers. They really need continuing electricity supply to support their production plans.

KIJA also support its industrial customers by providing dry port, namely Cikarang Dry Port. It offers one stop service for cargo handling and a logistics solution for international export and import, as well as domestic distribution. The dry port provides integrated port and logistics services with dozens of logistics and supply chain players, such as exporters, importers, carriers, terminal operators, container freight station, bonded warehouse, transportation, third party logistics (3PL), empty container depot, as well as banks and other supporting facilities. The company provides area of approximately 70 ha for the dry port.It is very good to attract any potential industrial customers by providing the dry port. The shipment process time can be reduced significantly. Thus, the export-import activities will be improved in the near term. The direct impact is any industrial customer will be able to meet their demand faster compared to the previous time.

After being successful in selling the 1st and 2nd industrial area, KIJA is in selling the 3rd industrial area located in Cikarang. The area will be equipped by many kind of supporting facilities such as standard factory building (SFB), theein one building (TOB) and supporting industrial building (SOB). Up to now the company already sold the area of approximately 44 ha.

We have positive outlook of KIJA's performance in the long future. The company provides gas power station for its industrial customers for securing the electricity supply. It has strong revenue portfolio, does not depend heavily on selling residential and industrial areas. Service and maintenance and also income from electricity power as recurring income contribute significantly to total revenue. Thus, it will be able to maintain the company's performance in the future. On the other hand, by providing gas power station and good service and maintenance will be very attractive for any potential customer. The location of KIJA which is in Cikarang area is also benefited industrial customers. Another attractive point of KIJA is the dry port which can accelerate the shipment of goods which are produced by industrial customers. We forecast that the company will record revenue of Rp763 billion and net profit of Rp72 billion in 2010F. The price target of KIJA is Rp310 by using NAV method. The recommendation is BUY.