Winds of change By Renaldy Effendy The coal industry has been undergoing a de-rating for the past 7 years. Since the peak in 2007 with a trailing P/B of 6.7x, the mining index is trading at 1.8x representing a 73.6% decline from the peak. Coal related company such as United Tractors (UNTR, a mining and construction services company) has also experience a squeeze in its valuations. According to Bloomberg, UNTR’s shares are trading at 1.8x trailing P/B, which represents 66.5% squeeze vs. its peak in 2007 (5.4x P/B). Obviously, investors are factoring in a challenging outlook on the company. In our view, UNTR’s management team fully understands the challenging headwinds the company is facing. At the same time, we believe they are ready to strategically diversifying its business line up. According to the management, despite stable financial status of the company, declining coal prices have placed negative implications on its heavy equipment (HE) sales. Given majority of its business is related to the mining industry, we believe UNTR’s revenue will continue to experience contraction. Indeed, its Komatsu sales declined 13% YoY. However, we also highlight that its HE market share remains stable at 40%. Given its revenue dependency is highly concentrated towards the mining industry; the company’s management team is revisiting its business strategy. According to multiple press reports, UNTR will expand into the construction business by acquiring 50.1% stake in Acset Indonesia. Although the details on the schedule have not been clarified yet, we expect the acquisition to take place early next year. Management stated that the company will boost heavy equipment sales to builders and expected to see revenue contribution to be around 30~ 35%. Given the new administration’s focus on developing infrastructure projects, we expect the strategic adjustment to contribute higher revenue going forward. #DailyFocus ow.ly/FzJmo
Posted on: Tue, 09 Dec 2014 01:28:50 +0000
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