- We maintain our HOLD call on UMW with a lower SOP-derived fair value of RM12.20/share (vs. RM13.10/share previously), mainly after revising down our target PE for the auto division to 11x from 12x given an increasingly challenging outlook.

- We attended UMW’s 1Q14 results briefing yesterday. As a recap, UMW’s 1Q14 results were in line with our estimates and consensus. Net profit of RM236mil accounted for 24% of our estimates and 25% of consensus (See table 1).

- On the auto division, management alluded to stiff competition in the B segment, particularly from the new City. Discounting is already seen for the Vios, which was only recently launched in 4Q13. Incremental marketing/campaign cost is also an earnings risk. The YoY improvement in auto division earnings was mainly due to an exceptionally low base last year.

- There is still little clarity on UMW Toyota’s plan to jump on the EEV bandwagon, which might affect UMW Toyota’s industry positioning. The new Honda City (which is priced 12% cheaper than the previous version) is likely to benefit from EEV incentives given Honda’s plans to locally assemble the City Hybrid, which comes off the same platform.

- On top of this, there seems to be limited capacity for growth at UMW Toyota’s Shah Alam plant, which is running at FY14F utilisation rate of ~90% (based on an estimated 110K/annum capacity). However, we do not rule out possible contract assembly by affiliated companies. To cushion the impact of competition, UMW Toyota is placing emphasis on after-sales to capitalise on the huge pool of Toyota models in Malaysia’s car population.

- Meanwhile, Perodua may see earnings pressure in the next 1-2 years from the start-up cost of its new plant, which will commence operations in 2H14.

- O&G remains a growth division, but now accounts for just 19% of our FY14F group earnings post-IPO dilution. The Naga 5 jack-up rig, which is expected to commence operations in May 2014 should provided an earnings kicker, while the Naga 6 and 7 are to be delivered in September and December 2014.

- The equipment division is seeing challenges:- (1) In Papua New Guinea, gold mining activities is down due to lower gold prices; (2) In Myanmar, jade mining has not resumed due to internal issues. Counter-measures include focusing on spares and maintenance as well as exploring supplying construction equipments in Myanmar where UMW has an exclusive Komatsu franchise.

- Our forecast remains unchanged, but there could be downside bias from:- (1) Perodua’s start-up cost; and (2) Increased competition in UMW Toyota’s key B and C segments.

Source: AmeSecurities