- We maintain our HOLD call on UMW at a lower fair value of RM11.70/share (from RM13.60/share) following the release of  weak 3Q13 results. UMW reported net profit of RM102mil for its 3Q13, which brought 9M13 earnings to RM572mil. This is below expectations - accounting for 54% of our FY13F earnings and 59% of consensus estimates.

- Key drag on the results was:- (1) Weak auto division driven by run-out of the old Vios (naturally involving heavy discounts to clear off old stock) ahead of the launch of the replacement model in October. However, the impact should be limited to 3Q13; (2) M&E losses widened to RM31mil in 3Q13 from RM3mil in 2Q13 due to impairment of assets and the weakening of the Indian Rupee which resulted in unrealised forex losses on its USD loans.

- Key deviation against our forecast was mainly from weaker than expected Toyota sales and weaker than expected margins. So far this year, Toyota sales have fallen short of our estimates (YTD October Toyota TIV: 85,408 units) and despite the launch of the new Vios in early October, we doubt UMW Toyota can hit our earlier target of 105K unit sales.

- We have lowered our FY13F-15F projections by 7%-17% over FY13F-15F as we revise down our Toyota unit sales projection by 5%-8%. Our earnings revision also factors in the dilution in UMW’s stake in UMW O&G to 61% (mainly from FY14F onwards with a 2 month impact for FY13F).

- UMW will be receiving proceeds of RM648mil from the sale of its shares in UMW O&G (shareholding is now down to 61%), on top of a RM597mil proceed (from UMW O&G’s IPO proceeds) for repayment of inter-company borrowings (mainly for Naga 4 acquisition) from UMW to UMW O&G. While a portion of the RM648mil proceed will be utilised to repay borrowings, UMW has allocated an amount for potential M&As – expected to be the next growth unit for UMW but with less capex intensity relative to its O&G business.

- UMW Toyota has undertaken capacity expansion at its plant which will enable 80K-90K/annum production from the current 70K/annum – RM500mil capex over the past 2-3 years. A key new model next year will be the C-segment Altis, which historically generated average volumes of 540 units/month and accounted for 7% of Toyota TIV. The new Vios has now garnered up to 14K bookings from 8K a few weeks after launch. This will be a key driver for UMW after this weak 3Q13.

- Despite subdued earnings, UMW proposed a 25sen/share dividend, representing a 287% payout of 3Q13 EPS and 66% on YTD basis. Decent dividend yield of 4% should cushion share price downside.

Source: AmeSecurities