- UMW has been awarded a contract extension for Naga 1 (semi-sub rig) by Petronas Carigali. The extension consists of two portions:- (1) Extension of 281 days (from current contract completion on 12 Nov 2015 to 19 Aug 2016) to adjust for unutilised period during Naga 1 upgrading works from Apr 2012-Jan 2013. Day rates remain the same; (2) Further extension of 2 years commencing Aug 2016 for contract value of USD130mil.

- UMW is getting higher rates for the 2-year extension – from USD138K/day for current contract to USD180K/day for new contract. The higher rates will only be reflected from FY16 onwards, as such no change to our projections. We are overall positive on the development and UMW’s effort to lock-in current favourable rates.

- However, the stronger Ringgit means that UMW’s rig contracts denominated in USD will be impacted negatively. The USD has depreciated 6% against the USD vs. the past 12 months peak of MYR3.20:USD in May 2012. We estimate that an every 1% change in MYR:USD will dampen bottom line by 0.5% - O&G contribution is still small to group earnings, i.e. c.5% (FY12), but this should grow to 16% of group earnings in FY13F.

- Meanwhile, for exposure to Perodua’s earnings upside this year, investors are better off with MBM:- (1) Perodua accounts for 70% of MBM’s bottom line vs. just 15% of UMW’s bottom line; (2) MBM offers much a cheaper access to Perodua, trading at 9x FY13F earnings, vs. UMW’s elevated valuation of 15x.

- UMW O&G IPO will have a net dilutive impact on UMW’s market cap given the hollowing out of its stake in UMW O&G. Implied valuation of UMW O&G division at current market cap is 18.5x FY13F earnings, a mere 3%-8% discount to indicative IPO valuation.

- 1Q13 results will be announced next month and generally, we expect UMW Toyota – which accounts for 63% of UMW’s bottom line – to significantly underperform peers as: (1) UMW Toyota does not benefit from the huge depreciation of JPY and instead purchases imported kits in USD (JPY depreciated 25% against past 12 months’ peak vs. 6% for USD). Both Tan Chong and MBM (via Perodua and Hino) are key beneficiaries of the weaker JPY; (2) Toyota sales dropped 11% YoY in 1Q13 vs. Nissan’s (Tan Chong) +83%, Perodua’s +4.4% and Honda’s (DRB) +479% in the same period. The revision cycle for UMW seems to have peaked and we recommend investors to take profit and switch into TCM (BUY, FV: RM6.40/share) and MBM (BUY, FV: RM4.60/share).

Source: AmeSecurities