- UMW’s 2Q13 results came in within expectations. The group reported a net profit of RM251mil for its 2Q13, bringing 1H13 earnings to RM471mil. This accounts for 44% and 43% of our and consensus estimates respectively. We expect a stronger 2H13 from contribution of the new Vios in 4Q13.

- 1H13 earnings were up by 5% YTD, driven mainly by earnings growth at its O&G division. However, earnings fell for the other divisions. In particular, its auto division reported an earnings decline of 15% YoY (-10% YTD) given the weak Toyota sales since early FY13 (Toyota sales: -19% YoY).

- O&G earnings growth were mainly driven by:- (1) New contribution from Naga 4 that commenced operations in Apr 13; (2) New rates for Naga 2 (+15% vs. previous contract which ended in March 2013); and (3) Sale of property by one of the subsidiaries - we suspect this contributed to the exceptionally strong jump in O&G margins (2Q13 O&G pretax margin: 45% vs. 1Q13: 12%).

- Launch of the new generation Vios last week should give Toyota a boost, although numbers will only be captured in 4Q13. We have factored into our numbers new Vios sales at an average of 2700 units/month.

- We think margins could be exceptionally strong moving forward. This is because UMWT has decided to price the new Vios at RM1000-RM2000 higher than the previous generation’s comparable variants, despite the slightly higher localisation of content (from 38% to 40%) and a minor price reduction for parts (by virtue of some common suppliers with Perodua).

- The strength in USD is a key risk. UMW Toyota imports entirely in USD – every 1% change in USD impacts group earnings by 4%. Meanwhile, Perodua imports entirely in JPY, but impact on group earnings is less than 1% for every 1% change in JPY.

- Share price has taken a beating (–11% in the past 2 weeks). This is partly due to fundamental risks from a stronger USD as well as stretched valuations and high foreign shareholding (at 28% before sell down) amid foreign funds exiting the local market.

- Maintain HOLD at an unchanged SOP derived FV of RM13.60/share.

Source: AmeSecurities