A steadier ride for UMW in 3Q

A steadier ride for UMW in 3Q
Tags: Brokers Call | UMW Holdings (M) Bhd | UOB Kay Hian research

Written by Financial Daily
Tuesday, 17 November 2009 11:02

UMW Holdings (M) Bhd
(Nov 16, RM6.32)
Hold at RM6.30: We expect UMW to post sequentially stronger 3Q09 results, with core pre-tax profit rising by over 10% quarter-on-quarter (q-o-q), lifted by the gradual recovery of auto sales volumes.

We expect to see continued improvement in the overall total industry volume (TIV) as consumer sentiment and spending gradually recover after the steep contractions experienced in Jan-Apr 2009.

Toyota’s unit sales rose 8.9% q-o-q in 3Q09 to just over 22,000 units with a recovery in sales of the Vios and Altis models (although Toyota’s overall 3Q09 sales were still down 15.5% year-on-year).

Year to date, sales are down 24.8% y-o-y after an exceptionally strong 2008.

UMW’s 38%-owned associate Perodua’s upcoming entry into the multi-purpose vehicle (MPV) segment on Nov 23 should mildly lift its contributions to UMW’s bottom line. Perodua commands a 31% market share of the overall auto industry and accounted for just under 5% of UMW’s pre-tax profit in 2008.

Priced at RM56,000 to RM64,000 for a 1.5-litre engine, the MPV marks Perodua’s entry into the fast-growing segment, which already accounts for almost 12% of TIV, year to date.

Perodua’s entry into the MPV segment will also mitigate market share losses experienced by Toyota’s models in the segment following the launch of Proton’s Exora in April 2009.

We expect 22%-owned associate WSP Holdings Ltd to also post a better 2H09 as improving prospects of the oil equipment industry in China should mitigate any weakness in the North American OCTG (oil country tubular goods) market.

2010 should be a recovery year with group earnings to recover by 34%, driven particularly by the auto and oil and gas (O&G) division, with the latter’s growth driven by sales and margin recovery at WSP, full impact contribution from 34%-owned Zhongyou BSS (China).

The positive impact of the US dollar’s weakness against the ringgit will begin filtering through to UMW’s bottom line starting 4Q09.

To recap, we estimate that every 1% depreciation of the US dollar theoretically raises net income by 2% (taking into consideration savings from dollar-denominated costs at UMW-Toyota, translation gains from US dollar debt, offset by some dollar-denominated earnings from the O&G division and associate companies).

However, associate Perodua will be hurt by the strengthening yen (which is up around 10% versus the ringgit since this year’s lows). We estimate that every 1% rise in the yen rate would cause a 0.7% decline in UMW’s earnings.

While we are optimistic about the group’s prospects across all divisions, we do not see much near-term upside to valuation, which is already at 14 times 2010F price earnings (PE). This is at par with the peak valuations reached in 2007 when oil prices were at record highs.

We maintain hold and sum-of-the-parts valuation of RM6.56. A good entry price would be at the RM6 level. Meanwhile, the potential listing of the O&G division, which may materialise only in 2H10, is neutral to the stock unless crude oil prices spike significantly higher. — UOB Kay Hian Research, Nov 16


This article appeared in The Edge Financial Daily, November 17, 2009.