UNTR - Blessings from surging commodity prices

• UNTR’s 1Q22 net profit rose 131.5% YoY to Rp4.32tn, representing 34.9% of our FY estimate 

• We expect that Komatsu sales will reach 5,000 units in 2022, driven by soaring commodity prices. Furthermore, we anticipate coal production of 123mn tons and overburden removal of 887mn bcm, while coal dan gold sales to attain c.9mn tons and 300K ounces, respectively 

• Reiterate our BUY call with 12.3% upside potential on a 12‐month view, backed by 1) solid outlook of construction machinery, mining contracting, coal and gold mining, construction; 2) further diversification; as well as 3) robust balance sheet 

Exceeding expectations UNTR’s net profit escalated 131.5% YoY to Rp4.32tn in 1Q22, accounting for 34.9%/34.3% of our/consensus FY forecasts. For construction machinery, revenue surged 122.1% YoY to Rp9.66tn in 1Q22 as Komatsu sales rose 146.2% YoY to 1,694 units, particularly from mining, forestry, and construction amid soaring commodity prices especially coal as well as infrastructure development. Revenue of spare parts and maintenance services also went up 48.7% YoY to Rp2.41tn in 1Q22. Meanwhile, mining contracting revenue increased 21.5% YoY to Rp8.47tn in 1Q22 as overburden removal grew 9.0% YoY to 207.3mn bcm, while coal production declined 12.1% YoY to 23.9mn tons. With regard to coal mining, revenue jumped 91.7% YoY to Rp7.59tn in 1Q22 due to higher ASP, despite lower sales volume by 20.6% YoY to 2.95mn tons as coal exports were restricted in January 2022. In terms of gold mining, revenue decreased 11.4% YoY to Rp1.99tn in 1Q22 in line with reduced sales volume by 22.1% YoY to 74K ounces on the back of lower grade extraction, although ASP rose 12.8% YoY to USD1,871/ounce. For construction, revenue fell 27.9% YoY to Rp274bn in 1Q22, hampered by delayed projects during pandemic, with net loss of Rp25bn, declining 68.8% YoY. Expecting strong demand for heavy machinery We revise up our assumption of Komatsu sales from 3,700 units to 5,000 units in 2022, driven by soaring commodity prices and infrastructure acceleration. However, surging demand for heavy equipment amid limited supply has resulted in Komatsu backlog until Mid‐2023. UNTR plans to raise prices gradually to its customers. Furthermore, we believe that new capital city development will boost sales of construction machinery in the long run. Nevertheless, we see a stiff competition coming from small and medium heavy equipment players. Meanwhile, we expect sales of spare parts and maintenance services revenue to grow 15% YoY in 2022. For mining contracting, we anticipate coal production of 123mn tons and overburden removal of 887mn bcm this year. During strong coal prices, the company does not expect to provide any discounts, while improving efficiency amid inflationary pressures. With regard to coal mining, we forecast stable sales volume YoY at c.9mn tons in 2022 due to logistics challenges. Aiming for a more sustainable portfolio We maintain our gold sales assumption of 300K ounces in 2022, particularly derived from lower grade ores mined in deeper pits. Management expects there will be no further capacity increase in Martabe mine for the next two years. Gold mining remains to be one of the primary focuses of UNTR’s business expansions due to its nature as a safe haven instrument. For construction, we anticipate ACST to book higher new contract value this year with focus on toll roads, foundation, and structure works, supported by infrastructure acceleration, economic improvement, and stronger balance sheet. Meanwhile, UNTR will reduce its exposure to thermal coal, while expanding to feasible and sizeable non‐coal businesses, including gold, copper, nickel, and other minerals. Furthermore, the company will develop renewable energy as a part of its strategic transition plans, namely large‐ scale hydropower, floating solar PV, geothermal, wind power, and waste‐to‐energy. UNTR aims to create a more balanced business portfolio with non‐coal related segments are targeted to contribute 40% of revenues, thus generating more sustainable earnings. In addition, the company will maintain strong liquidity position to 1) fund its expansion plans and capex as banks tend to reduce coal exposure; 2) repay debts; as well as 3) anticipate possible merger and acquisition. Reiterate BUY on the back of improving economy and soaring commodity prices We maintain our BUY recommendation with a higher DCF‐based price target of Rp34,000 per share. The stock is currently traded at a 2022 PER of 7.5x and PBV of 1.4x. We remain sanguine on UNTR’s outlook, driven by 1) solid performance of construction machinery, mining contracting, coal and gold mining, as well as construction following economic recovery, surging commodity prices, and infrastructure development; 2) diversification to gold, coking coal, infrastructure, and energy that will reduce its reliance on thermal coal; 3) robust balance sheet with net cash position and prudent financial management; as well as 4) digital initiatives to improve efficiency and operational excellence. However, we note several downside risks to our recommendation, namely 1) lower‐than‐ expected coal and gold prices as well as infrastructure spending; and 2) Rupiah appreciation.