-  We raise our fair value for UMW to RM13.60/share (from RM13.20/share previously,) but downgrade the stock to HOLD from BUY given a limited upside at current levels and weaker earnings momentum in the near term. The stock has appreciated by 80% since our upgrade to BUY in April 2012.

-  We raise earnings by 2%-8% over FY13F-15F to reflect:- (1) Higher Toyota sales target to factor in the new Vios – we assume 2.7K monthly Vios sales in 2H13 from c.2K/month currently. All in, we expect a marginal 1% growth in Toyota sales to 106K this year; (2) Higher rate assumptions for Naga 2 and Naga 4 at USD139K-146K/day vs. USD135K/day previously following Naga 2’s new contract with PetroVietnam announced recently and Naga 4’s contract yesterday.

-  Notwithstanding the earnings upgrade, our projections are more or less in-line with consensus and at this juncture, we see limited scope for further upside. A key wildcard would be acquisitions in the O&G space, though we believe this might only materialise post-listing once the unit has recapitalised.

-  Furthermore, earnings momentum is likely to weaken in the near term given softening Toyota sales. The phenomenal earnings growth (+96%) in FY12 was driven by strong Toyota sales (+21% YoY vs. ind: +4% YoY) (off aggressive new model launches since Nov-Dec 2011) and absence of chunky provisions for the O&G segment seen in FY11.

-  Coupled with aggressive competition now, FY13 earnings growth should normalise (FY13F: +12% YoY). YTD, Toyota sales are down 5.5% (vs. industry: +18%). Management conservatively targets a flat Toyota sales growth at 105K this year versus 105,000 in FY12. Vios sales seems to have started to be impacted by a recently-launched competing B-segment model and we do not rule out discounting (negatively impacting margins) to hold up sales volumes.

-  While we expect the bulk of FY13F growth to come from the O&G segment, upside from its potential IPO is almost fully reflected at the current market cap. As implied valuation is already close to indicative IPO valuation, a dilution in earnings (from a reduced stake in O&G) will have a net dilutive effect to existing market cap. To put things into perspective, assuming IPO valuation at 20x FY13F earnings and a 25% stake dilution in UMW O&G, we estimate a 3% dilution to UMW’s market cap post IPO (See Table 3).

-  From a valuation standpoint, a PE of 15x FY13F looks rather stretched vs. historical trends (>1SD above historical average). Implied O&G valuation at current market cap is quite rich at 18x, versus indicative IPO valuation of 19x-20x. We suggest investors take profit on share price strength and switch into more compelling investment cases such as TCM (BUY, FV: RM6.40/share – refer to report dated 26 Feb) and MBM (BUY, FV; RM4.60/share).

Source: AmeSecurities