United Tractors

If we talk about United Tractors (UNTR), then we are talking about the biggest companies in Indonesia in two fields at once, ie heavy equipmentss and coal mining contractor/services. UNTR is one of the ten largest stocks in term of market capitalization on the Indonesia Stock Exchange (fluctuate, sometimes UNTR out of the list if the stock price was down). UNTR also has a history of a very solid performance in the long run. When the coal industry began to flourish in Indonesia since the early 2000s, UNTR kept growing into the second largest contributor of revenue (after the auto business) of its parent company, Astra International (ASII). Yup, of ASII’ revenue of Rp150.6 trillion (about US$ 14 billion) until the third quarter of 2014, Rp40.8 trillion of which came from UNTR.

If we look at its current size, it may be difficult to believe that UNTR was (when the company was founded in 1972) only a small company in the field of distribution of heavy equipments with brands of Komatsu, Tadano, and Bomag. And until about twenty years later, UNTR did not experienced significant development. After the company was acquired by Astra Group in the late 1980s, that’s when UNTR began to expand, first by went public (held an IPO), and entering the coal mining contractor industry by establishing PT Pamapersada Nusantara (PAMA). The new venture later proved to be a great success, which in the hands of the Astra Group, PAMA growing to become the largest coal mining contractor in Indonesia at the moment, with a market share of about 45% at the end of 2013.

While in the original business of heavy equipments distribution, UNTR also continues to grow. From initially just holds the distribution rights for three brands of heavy equipments (Komatsu, Tadano, and Bomag), UNTR now also sells heavy equipments of Komatsu Forest, UD Trucks and Scania Bus (and will probably increase again in the future). Not only buying and selling, UNTR also provides complete solutions related to heavy equipments, such as field consulting, providing recommendations for optimal use of heavy equipments, after-sales service, spare parts, to guaranteed supports. If PAMA has been a number one company in the industry of coal mining contractors, in the business of heavy equipments UNTR still have to compete with Trakindo Group, which is a distributor of Caterpillar, to become the largest heavy equipments (or also called ‘construction machine’) company in Indonesia (but with a 40% market share, UNTR remain one step ahead of Trakindo).

Success in both the field of heavy equipments and coal mining contractor, in 2007 UNTR began to enter the coal mining itself. Until the third quarter of 2014, UNTR is holding at least ten coal mining blocks/concessions with total reserves of more than 409 million tons, which makes UNTR as a middle-class coal company in Indonesia (much smaller than ADRO, BUMI, or PTBA, but larger than KKGI, HRUM, or GTBO). Unfortunately the company lost momentum when the price of coal was booming in 2011, because the majority of the concessions were not ready to produce. In 2014, there are at least two coal mining concessions that are ready to full operate, but the company has not started a full-scale production because still waiting for the price (of coal) to recover. As a result, until the third quarter of 2014, from UNTR’ total revenue of Rp40.8 trillion, only Rp3.9 trillion that came from the sale of coal. In the lates public expose held by the company, the management stated that they will do nothing related to their coal reserves but continue to wait until the selling price of coal recovered by itself.

The expansion continues (and this is one reason of why do I like the company, because UNTR always expanding its business, either by setting up new subsidiaries, formed a partnership with other companies, etc., without a lot of talking! So do not be surprised if the company continues to grow significantly). In 2014, the company went into a new venture by acquiring 50.1% stake of PT Acset Indonusa, Tbk (ACST), thus UNTR become ACST’ controlling shareholder, and ACST become a new member in the large family of the Astra Group. The acquisition value was undisclosed, but I believe that it is done at a reasonable price. Some security analysts assess that this corporate action could have a negative impact on the overall performance of UNTR, as it may cause UNTR to lose focus, because the company had never played in the construction sector before.

However, I have different opinion. Since the beginning, Astra Group has been keen to enter the real estate business and property contractor/building construction, and that's why ASII through one of its subsidiaries (not UNTR) began to build the Menara Astra (Astra Tower) since last 2013, in collaboration with the Hong Kong property company who a subsidiary of the Jardine Group, Hong Kong (ASII is a subsidiary of the Jardine Group). As for the construction business, rather than establishing a brand new construction company and pioneered everything from scratch, it is far better to acquire a small construction company which could be great someday. And with an excellent track record of performance in recent years, ACST is the best option. With the outstanding supports of capital and others from Astra Group, ACST is very likely to be a large construction company someday (Astra Group has almost been successful in whatever business they are in). Currently ACST is only a relatively small construction company if compared to Adhi Karya et al. with the value of assets of Rp1.4 trillion (about US$ 120 million) in the third quarter 2014.

Then why Astra acquired ACST through UNTR? Well that’s because UNTR have been experienced in the business of heavy equipments for construction projects (note that UNTR does not distributing heavy equipments for coal mines only, but also for forestry, plantations, and building constructions), or matc with the type of business of ACST. It is ridiculous if ASII acquired ACST directly or through Astra Graphia (ASGR), for example, because the management would not know what to do with.

So, until the time when this article was written, UNTR has had at least four types of business: 1. Distribution of heavy equipments, 2. Coal mining contractor, 3. Coal mining, and 4. Construction. For me, it is a great business combination and also complementary, where a coal miner requires coal mining contractor, and the contractor requires heavy equipments. And besides heavy equipments for coal mines, UNTR can also provide heavy equipments for construction purposes for ACST, which is its own subsidiary (UNTR could also get into the oil palm plantation business, because the company also sells heavy equipments for plantation, but it was not done because the business has been held by its sister, Astra Agro Lestari/AALI).

So what caused the stock of UNTR down lately?

If we look at UNTR’ performance in the second quarter of 2014, where its earnings rose significantly for the first time (in 2012 and 2013, the company’s profits had dropped), then the decrease of the stock from Rp24,000 per share to 18,000 (a few days ago it was even touched 16,850), at first glance seems to cannot be explained by fundamental analysis. However, the fact is, when UNTR was at its peak position (24,000s), then it means that it has gained of more than 30% since the beginning of 2014, and it is an overly optimistic rise because the coal sector was actually not fully recovered. Anothe fact, at the price of Rp24,000 per share, the stock of UNTR had PER and PBV of 14.1 and 2.5 times respectively (based on the financial statements in the second quarter of 2014), or could not be said to be cheap, once again, if we considering the situation of the sector. It seems that investors who bought the stock had been too dazzled by the performance of the company at the beginning of 2014, where UNTR successfully recorded a net profit increase of more than 40% while there are many other coal mining or coal mining contractor companies whose profits are still dropped in this year.

Luckily, until the third quarter, UNTR still successfully maintaining its solid performance, where even though the company has paid dividend of Rp727 billion, but the total equity value is still growing 8.5% since the beginning of 2014, and its net earnings are still growing above 40% compared to the same period of 2013. Operationally, UNTR still experiencing a decline in sales of heavy equipments, especially heavy equipments for coal mines and plantations (while the sales volume of heavy equipments for construction and forestry is still increasing). Yet somehow, the value of the company's revenue from the sale of heavy equipments could rise slightly to Rp17.3 trillion until the third quarter of 2014, compared to Rp17.0 trillion in the same period in 2013.

And the main cause which makes UNTR profits to go up, is because PAMA as its subsidiary has been successful in term of increasing the efficiency of their works as a coal mining contractor. Until the third quarter of 2014, PAMA has raised at least 89.9 million tons of coal, up significantly from the same period in 2013 which 78.5 million tons, whereas the volume of overburden (the layer of soil that must be moved so the coal below it could be taken) dropped from 639.5 into 605.5 million bcm. This means PAMA dig less soil, but produces more coal (its stripping ratio became smaller, the explanation below). As a result UNTR recorded a profit of Rp5.4 trillion from coal mining contracting business, or a significant increase over the previous year which only Rp3.4 trillion.

(note: if you are still confused about what is the difference between a coal mining with coal mining contractor, the point is, a coal mining company is the owner of the excavated coal. While coal mining contractor company, they just excavate the coal belonging to other companies, then getting paid for the work).

While for the business of coal mining and building construction, there are not much story to tell, because UNTR still experiencing losses (although not significant) from the coal mining business, due to lower selling prices. For revenue from the construction business may only be fully consolidated in the next year, because ACST was acquired on October 10. Luckily, about 60 – 65% of UNTR revenues derived from coal mining contractor, and it was this business that are growing rapidly after PAMA successfully improve the performance efficiency. FYI, the coal mining contractor income is not dependent on the selling price of coal, but depending on its stripping ratio, ie the ratio between the amount of coal extracted by the volume of soil layers moved. The smaller the number (of stripping ratio), the less the volume of soil that must be moved to the same amount of coal, so that the excavation cost becomes less as well (so that the profit margin becomes larger). About the price of coal sold, it is a business of the coal owner, not PAMA as ‘employee’.

Thus, I assume that UNTR is still offer interesting prospects (including for long-term), especially, again, because the company is managed by Astra Group. And if later the coal prices eventually recover (and I personally believe that it will happen someday), then UNTR can maximize its coal concessions, so that the revenues will increase significantly. Some investors may be concerned by the news that UNTR has restructured some of its subsidiaries, which it feared would interfere with the performance of the company, and that's why the shares are dropped. But in fact, the restructuring aims to make the company to be more focus on running the business of coal mining contractor.

So here’s the detail of the restructuring. UNTR has a subsidiary named PT Tuah Turangga Agung (TTA), which is the owner of six coal mining concessions (so UNTR, through TTA, was the owner of six mining concessions). Then, through PAMA, UNTR also has four other concessions (so the total are ten concessions). To make PAMA to stay focused on their business activities as a coal mining contractor, all of the four concessions are then transferred to TTA ('restructuring'). So now UNTR still has ten coal mining concessions, but all through the TTA instead of PAMA. Thus, PAMA can refocus on coal mining contracting business, while for coal mining affairs, UNTR can hand over the enitre responsibility to the management of TTA. So, there is not a single problem right? The word 'restructuring' might be a negative connotation if it is done by the Bakrie Group, but do not worry, we talk about Astra here.

Okay, so it means that UNTR at the current price (Rp18,375 per share) worth the buy?

Before answering the questions above, then we have to learn the 'character' of blue chip stocks like UNTR. As a company that 1. Have a prominent name and brand, 2. Currently the market leader in its fields, 3. Is the part of Astra Group, 4. Has a track record of excellent performance in the long term, and 5. The shares are highly liquid, then it is fair that the price of UNTR is relatively high. In the year of 2011 when the coal mining business reached its peak, UNTR was once reached the price level of Rp33,000 per share, which reflects the PBV of more than 5 times (based on the equity position of the company at the time). While at other times, the PBV is usually in the range of 2.5 - 3.5 times.

However, the stock may down sometimes until the valuations are no longer as high as usual. For example in 2013 where UNTR’ profit was down, or just like today, where the stock beset by negative sentiment about the restructuring, and also the weakening of coal prices. But wll, as you can see by yourself: No problemo!

So the conclusion is quite clear: It's an opportunity. You know, you can not buy a blue chip stock at a low price everyday, and UNTR is one stock that I’ve been admire since a long time ago, but could not buy it because the price was always overpriced (while in 2013, the profits are still down). Meanwhile, if we look at blue chip stocks with good fundamentals such as Perusahaan Gas Negara (PGAS), Unilever Indonesia (UNVR), to Jasa Marga (JSMR) which also had come down because of certain negative sentiments but yet eventually rise again (because their performance did not decline anyway), then likewise with UNTR! Don’t be too optimistic, if later this UNTR back to 22,000 only, the gain is already approaching 20%, is not it? So once again, it's an opportunity. Moreover, we know that the city government of DKI Jakarta is planning to increase its fleet of TransJakarta with Scania buses, which UNTR is the main distributor of Scania Bus in Indonesia.

Only, of course, every opportunities are always accompanied by risk factors. UNTR may be further down, or at least retained at the current price level, if the price of coal depressed once again (we never know about it, and even Warren Buffett can never predict commodity prices). But beyond that, well, this 'blue thing' is too beautiful to be ignored.

PT United Tractors, Tbk (UNTR)

Rating Performance in Third Quarter 2014: A

Rating of Share Price at Rp18,375: AA

Disclosure: When the article was published, Avere Investama (Teguh Hidayat & Partners) is in a position of UNTR on an average price of Rp18,025 per share. This position can be changed at any time without prior notice.

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.