- We maintain our HOLD call on UMW with a lower fair value of RM10.70/share (vs. RM11.40/share previously) following earnings cuts in this report.

- UMW reported core net profit of RM182mil for its 1Q15, which was within our expectation but below consensus, accounting for 22% and 20% of estimates respectively. Group earnings were down 23% YoY, dragged mainly by the automotive and O&G divisions.

- Automotive: Toyota TIV declined 33% YoY and 41% QoQ. Pretax earnings were down 43% YoY (-25% QoQ) as margins (-3.7ppts to 12%) were impacted by:- (1) the stronger USD; and (2) diseconomies of scale given lower manufacturing volumes.

- Toyota TIV was impacted by stiff competition and new launches from Honda, Mazda and Nissan as well as the lack of volume model launches from Toyota this year. New launches in FY15F are focused on mid-to-higher priced models i.e. the new Camry/Hybrid and the new Hilux. We think the Camry (launched Apr 2015) could drive improvements in underlying margins, but 2Q15 will also reflect a further climb in USD to the 3.5-3.7 levels, which will likely offset the positive impact.

- O&G: 1Q15 earnings (-27% YoY, -51% QoQ) and margins were impacted by:- (1) discounts on charter rates given to existing clients given the drop in oil price: and (2) additional opex for Naga 7 which saw its contract with Frontier Oil terminated. This is despite higher revenues (+60% YoY) driven by full-quarter contribution of Naga 5 and 6, improved operating efficiency for Naga 2 and 3, and translation gains from the stronger USD.

- Though UMW’s results were broadly in line (albeit at the lower end of our estimates), we trim our FY15F/16F/17F by 8%/7%/3% as YTD USD:MYR levels is still elevated at 3.62 in relative to our FY15F assumption of 3.40 previously (3.45 post-revision).

- Additionally, we trim our rate assumptions for selective jack-up rig contracts that are nearing expiry given a depressed outlook in the near-term, on top of higher cost for Naga 7 which saw its contract with Frontier Oil terminated. This results in a 6%/3% reduction in the O&G division FY15F/16F earnings (which is reflected in the earnings cut for the larger group).

- At 18% net gearing, balance sheet is pretty underutilised and proceeds from the listing of UMWOG in FY13 (~RM536mil unutilised yet) remain a wildcard for acquisitive growth. Immediate-term fundamentals however, remain lackluster and will drag share price performance.

Source: AmeSecurities Research - 28 May 2015