- UMW reported core net profit of RM203mil for its 3Q14, which brought 9M14 earnings to RM681mil. This is within expectations, accounting for 73% of our estimate and 76% of consensus. Group net profit was down 13% QoQ driven by softer auto and equipment division earnings, but rose 17% YoY from a weak base.

- Auto division: Toyota TIV fell 13% QoQ (+16% YoY) given the Raya festivities and the absence of the typical pre-Raya sales rush this year. Revenue fell 9% QoQ while pretax margins fell to 13% (from 14% in 2Q14) resulting in a 16% fall in auto division pretax profit. The YoY rise in revenue and volume are not surprising as 3Q13 was impacted by the run-down of the old Vios ahead of the new model in 4Q13. However, a stronger USD is a significant dampener to earnings going forward as UMW Toyota imports entirely in USD. Additionally, competitive pressure is likely to increase as players de-stock ahead of uncertainties in 2015, which may impact margins negatively in 4Q14. Our forecast has already factored in USD:MYR at 3.25 (for FY15F onwards) vs. spot rate of 3.3. Every 1% rise in USD impacts UMW bottomline by 2%.

- Oil & Gas division: Naga 6 will be operational in Nov 2014 while Naga 7 will be delivered in Dec 2014 which will boost 4Q14. However, a number of contracts (foreign mainly) are expiring in FY15F – the weakness in the sector may adversely impact renewal rates in the near term.

- Equipment division: 3Q14 earnings (-19% QoQ, -20% YoY) were hit by a slowdown in the heavy equipment sub-division arising from suspension of mining activities in Myanmar and drop in commodity prices in PNG. However, the sanction in Myanmar has been uplifted in Sep 2014, which will support a recovery from 4Q14.

- Maintain HOLD on UMW at an unchanged fair value of RM12.20/share given a lack of catalyst other than growth at its oil & gas division. Auto, which anchors group earnings, is still expected to perform poorly given a stronger USD and expectation of exceptionally stiff competition in 4Q14, while 1H15 is shrouded with market uncertainties. Nonetheless, our FY15F already implies flattish EPS growth. Share price has fallen sharply and we are starting to see trading opportunity in the stock.

Source: AmeSecurities