- We maintain our HOLD call on UMW at unchanged SOP derived FV of RM13.60/share following the release of its 1Q13 results. UMW reported 1Q13 core earnings of RM220mil, which accounted for 21% of ours and consensus full year estimates. This is broadly in-line with expectations as earnings should improve later in the year with the commencement of Naga 4 and launch of the new Vios.

- Auto revenues were down 4% YoY on the back of an 11% YoY fall in Toyota TIV in 1Q13. Nonetheless pretax profit held up pretty well (-1% YoY). We think this is buffered by: (1) Perodua sales were up 4% YoY while MYR strengthened 7.7% YoY against JPY; (2) Vendor price cuts helped Perodua and to a certain extent, Toyota (only for common vendors/parts with Perodua); (3) Favourable MYR-USD rate vs. a year ago (+3% YoY).

- The new Vios is expected to be launched in 2H13 - earliest, in August-September period. However, localisation rate will increase only slightly (from 48% to 50%) and pricing is not likely to be reduced to levels seen from a recently launched competing B-segment model. UMW is currently reconfiguring its existing Shah Alam plant to expand annual capacity by 14%-20% to 80K-85K. We understand that current Vios sales have been negatively impacted by competition. UMW is resorting to price rebates in May, which may help to buffer the volume decline, but this may come at the expense of margins.

- O&G revenues were down 58% YoY, while O&G pretax was down 22%. 1Q13 O&G net profit of RM17mil accounted for just 10% of our FY13F. We expect this to improve in the coming quarters as Naga 4 starts to reflect in earnings in 2Q13 (commenced ops in May) while Naga 2’s higher day rates will reflect from 2Q13-3Q13 (from June).

- UMW announced an acquisition of another jack-up rig from SD Standard Drilling PLC for USD223mil (RM673mil). The rig is under construction (by Keppel FELS) and is expected to be delivered in May 2014. We have raised our FY14-15F earnings by 2%-4% to factor in the new rig, assuming it attains similar rates as Naga 4 of c. USD150K/day. The acquisition raises UMW’s net gearing from 6% to 18% (FY14F).

- Valuations are pretty stretched at current levels at 16x FY13F earnings, well above historical average valuation of 13x and >30% above sector average PE of 12x. Post UMW O&G listing, we estimate a 5%-6% dilution to UMW’s market cap given a 39% dilution of its stake in its O&G unit’s profitable rig businesses. The loss making associates (comprising mainly its pipe manufacturing units) will remain under UMW.

Source: AmeSecurities