UNTR - Windfall from coal bonanza

• UNTR’s 1H22 net profit rose 129.3% YoY to Rp10.4tn, representing 69.2% of our FY estimate 

• Amid surging commodity prices, we expect Komatsu sales of 5,000 units, stable coal production, and overburden removal growth of 10% YoY in 2022. We also estimate coal and gold sales to attain c.9mn tons and 300K ounces, respectively. UNTR is gradually expanding non‐coal segments and renewable energy to reduce thermal coal exposure 

• Reiterate our BUY call with 15.0% 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 surged 129.3% YoY to Rp10.36tn in 1H22, accounting for 69.2%/64.8% of our/consensus FY forecasts. For construction machinery, revenue escalated 85.6% YoY to Rp17.43tn in 1H22 as Komatsu sales jumped 111.1% YoY to 2,873 units, particularly from mining, forestry, agribusiness, and construction in line with strong commodity prices and infrastructure acceleration. Revenue of spare parts and maintenance services also went up 35.7% YoY to Rp4.82tn in 1H22. Meanwhile, mining contracting revenue increased 29.2% YoY to Rp19.96tn in 1H22 as overburden removal grew 6.6% YoY to 436.5mn bcm, while coal production declined 13.1% YoY to 50.4mn tons. With regard to coal mining, revenue skyrocketed 149.2% YoY to Rp18.69tn in 1H22 on the back of higher ASP amid contracted sales volume by 7.6% YoY to 5.81mn tons, caused by export ban in January 2022. In terms of gold mining, revenue was down 10.4% YoY to Rp3.89tn in 1H22 in line with tumbling sales volume by 18.2% YoY to 143.8K ounces due to lower grade extraction, although ASP rose 8.3% YoY to USD1,873/ounce. For construction, revenue fell 25.2% YoY to Rp476bn in 1H22, hampered by delayed projects, with a decreased net loss by 25.5% YoY to Rp114bn in 1H22. Significant sales growth of heavy equipment We maintain our Komatsu sales assumption of 5,000 units in 2022, driven by surging commodity prices, boosting investments in mining and agribusiness sectors, as well as infrastructure acceleration. The company is leveraging momentum from strong coal demands due to tight energy market and principal’s ability to supply. Furthermore, UNTR plans to raise prices in stages amid intense competition particularly in small and medium heavy equipment segments. The company has also introduced environmentally friendly Komatsu HB365‐1 hybrid excavator that is able to save up to 17% of fuel consumption. Moreover, we expect sales of spare parts and maintenance services revenue to grow 15% YoY in 2022. For mining contracting, we anticipate that coal production will be relatively stable this year, while overburden removal to increase 10% YoY. This is due to plans of Pama’s clients to ramp up productions to monetize soaring coal prices amid geopolitical tensions. In addition, the company will not provide any discounts should coal prices remain high. We believe that USD appreciation coupled with improving efficiency will lead to margin expansions. Due to logistics issue, we estimate stable coal sales volume YoY at c.9mn tons in 2022. Focus on non‐coal mining and renewable energy We maintain our gold sales assumption of 300K ounces in 2022, particularly derived from lower grade ores mined in deeper pits. Gold mining remains to be one of the main focuses of UNTR’s business expansions due to its nature as a safe haven instrument during economic downturn. For construction, we expect ACST to book higher new contract value this year with focus on toll roads, foundation, and structure works. Meanwhile, UNTR strives to reduce its exposure to thermal coal, while gradually expanding feasible and sizeable non‐coal businesses, including gold, copper, nickel, and other minerals. As part of its transition strategies, the company will develop renewable energy. UNTR aims to attain 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 ample liquidity level to anticipate 1) limited financing for coal industry; 2) debt repayments; 3) merger and acquisition; as well as 4) expansion plans. Reiterate BUY on the back of improving economy and strong commodity prices We maintain our BUY recommendation with a higher DCF‐based price target of Rp37,000 per share. The stock is currently traded at a 2022 PER of 6.6x and PBV of 1.5x. 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, soaring 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.