Highlights/ Comments

The listing of UMW OG on 1 Nov, will promote revaluation on UMW’s share price. UMW OG has an initial market capitalization of RM6.05bn (RM2.80/share), higher than HLIB’s previous conservative RM2.6bn valuation for the O&G division.

Post the IPO exercise, UMW will hold 61.0% (55.15% assuming over-allotment) stake in UMW OG and receive RM647.9m from the ‘Offer-for-Sale’ shares. The proceeds will be used: 1) Repayment of Borrowings – RM203.0m; 2) Capital Expenditure – RM200m; 3) Working Capital – RM193.4m; and 4) Listing Expenditure – RM51.5m.

HLIB valued UMW OG at RM3.36/share based on 20x average FY14-15 P/E (as the full contribution from Naga 5 and Naga 6 will only be reflected in FY15). Overall, the IPO exercise will add ~RM1.00 to our SOP valuation.

Toyota car sales has considerably disappointed the market with only 64.1k units ytd (-16.1% yoy), mainly on the; 1) stiff competition; 2) uncertain government policies; 3) 13th General Election; and 4) lack of new models.

Despite the new Vios (launched 2 Oct) receiving over 10k orders, we fear that UMW risks missing its FY13’s 90k sales target on low inventory level as the production volume was surprising low in Aug-Sep (delayed delivery).

We expect Toyota sales to rebound in 2014, with full year contribution of new Vios and introduction of new Altis in 2H14. However, we expect market condition to remain tough in 2014, affecting margins and sales volume.

Perodua is expected to achieve its 194k sales target in FY13 with ytd sales of 147.4k units (76%). We expect continued sales growth in 2014 with new launching of Viva replacement model in 2H14.

Risks

Tightening of banks’ HP rules; Malaysian economy slowdown affecting TIV; Global automotive supply chain disruption; Ringgit depreciation; Global recession affecting O&G price; Relaxation of ‘domestic policy’ by Petronas.

Forecasts

Increased FY13-15 by 1.7%, 2.8% and 8.4%, after adjusting for improved earnings for Automotive (Perodua) and O&G (adjusted for minority interest post IPO).

Rating

Neutral

Positives –

• Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua.
• Turnaround of Oil & Gas division and eventual listing, as well as strong sales from Equipment division.
• Expanding reach of Manufacturing & Engineering division into fast growing China and India.

Negatives –

• High crude oil prices affecting margins of its oil based products i.e. lubricants.
• Increasing automotive competitiveness in Malaysia

Valuation

Upgrade to Neutral (from Sell) with higher target price of RM12.30 (from RM11.26) after taking into account improved earnings and O&G listings (based on HLIB’s TP).

Source:Hong Leong Investment Bank Research- 25 Oct 2013