Cheapest commodity play

Analyst: Liny Halim

Likely to secure more orders. After securing a US$175m order book (giant dump trucks and excavators) from the mining sector in 1Q09, Hexindo is now negotiating with Sinar Mas pulp business for 200 units of medium-sized excavators.

Hexindo is targeting equipment sales of 800 units in 2009E, down 50% yoy, but this excludes the potential order from the pulp sector.

In 1Q, Hexindo secured US$130m deal with KPC (owned by Bumi) for delivering 30 giant dump trucks and 4 big excavators. It also got another US$15m order from Newmont and US$30m from Thiess.

Margin should remain strong. Hexindo enjoyed high operating margin of 21.3% in 1Q09 versus 14.14% in 2008 due to increased contribution from high-margin spare parts business (gross margin of 35-40% vs equipment sales of 16%).

In 1Q09, spare parts accounted for 30% of revenues, up from 18% in 2008. Miners are extending their equipment lifecycle which therefore boosted spare parts sales.

As Hexindo sells more of the smaller equipment to the pulp sector in 2H09, it would benefit from higher margin of 17% versus the 10% margin for large equipment.Strong financial backing from parent.

We think Hitachi's recent move to set up financing arm (Hexindo has a 15% stake and Hitachi 85%) reflects the parent strong commitment to grow its business aggressively in Indonesia.This finance arm funded the equipment sales to KPC and to Thiess. Hexindo to contribute more to parent.

Additionally, Hexindo plans to change its financial reporting to US$ reporting so that it no longer has to suffer from forex losses. Its financial year will also be changed running to April-March, similar to parent. We think this implies that Hexindo will become a more important contributor to its parent, and therefore increased profitability.

Hexindo is 54% owned by Hitachi and 20% owned by Itochu.Paying dividend of Rp125/share or yield of 5.6%. Hexindo will hold an AGM on 29 June where it will declare a dividend of Rp125/share comprising of final 2008 dividend of Rp109/share (based on 35% payout ratio) and interim 1Q dividend of Rp16/share.

This translates to a yield of 5.6%.Strong profit in 2009. Hexindo booked a net profit of Rp62b in 1Q09 but this is after a Rp30b forex loss. If we were to adjust for the forex loss and annualised the 1Q09 earnings, this would give us a net profit of Rp340b in 2009E (+33% yoy), which should still be conservative.

As Hexindo booked more sales to KPC (the equipments are being shipped currently) and Thiess in 2H, this should increase profitability during the semester.Trading at half of United Tractors PER.

Based on back-the-envelope calculation of net profit of Rp340b (annualising 1Q09), Hexindo is trading on 2009E PER of 5.4x, at a steep discount to United Tractors PER of 13.3x.

We like Hexindo for its cheap valuation but we also like United Tractors as a bigger cap play in the commodity space.

Hexindo Adiperkasa (HEXA IJ) NOT RATED
Price: Rp2,200 Mkt Cap: US$189.7m Daily: Vol 8.0m (US$1.8m)1-Yr Hi/Lo: Rp3,400/510