Capturing momentum We raised our volume assumptions by 17-32% as demand picks up thus, upgrade earnings by 13% for 2010-2011. We expect margin recovery, in addition to volume growth to help boosting earnings, up 48% YoY, in 2010. Hexindo offers over 40% ROAE, 34% CAGR EPS growth, while still trades at 7.2x 2010 PER. We see 3.6% to 5.5% dividend yield over 2010 to 2011, driven by strong earnings and cash flows. BUY for 28% upside. Stellar performance Demand for heavy equipment staged a sharp recovery in 2H09 and we remain positive on 2010 and 2011 outlook. Hexindo sold 153 units of heavy equipments in December 2009, taking the total sales of the year to 1,251 units, higher than our forecast at 1,100 units. Thus, we have raised our volume forecast to 1,450 for 2009 and assumed 20% volume growth for 2010 and 2011, as we see continuing demand from resources related sectors. Additional kicker Hitachi Financing Indonesia has been more aggressive in providing financing for large mining equipment, supporting Hexindo’s strength in this segment. We forecast net revenue from large mining equipment to grow by CAGR 12% over 2009 to 2012. Potential for margin recovery Gross margin for small equipment was squeezed in the last four quarters as the company have absorbed some currency fluctuation while delayed rising prices due to concern over demand. As demand has recovered, and Rupiah, assumed, to hover around Rp8,800 in 2010 and onwards, and equipment price increase would be gradually passed on to the customers, we expect gross margin for small equipment to bounce from 5% in 2009 to a normalized level 10% in 2010 and 12% 2011. 5-year average for margin was 14%. As a result, we forecast overall gross margin, including sales of spare parts and services and big equipment, to improve from 23% in 2009 to around 25% to 26% in 2010 to 2012. Still a bargain Overall, we raise our earnings forecast by 13% in 2010 to 2011. Hexindo generates over 40% ROAE while earnings could growth at 34% CAGR over 2009-2012. This compares favourably to peers, while still trades at more attractive valuations. The company will be net cash by 2011 and dividend yield could hover around 3.6% to 5.5%. Our new TP is Rp4,600.
