Highlights/ Comments

The Indian operation of the Equipment Division had incurred significant losses in 3QFY13 due to severe assets impairments of circa RM30m and forex losses about RM10m on Indian Rupee against US$ borrowings (circa US$100m), which was offsets by forex gain recognition of the Sukuks (Holding Co Level) in 3Q13.

Management remained positive on the O&G division, as it expects 12 domestic jack-up rigs to expire in 2014. The demand for jack-up rigs would be coming from the marginal field developments and enhanced oil-recovery activities.

Naga 3 was down for a week in 3QFY13 due to a crack in the hull but has resumed operation for Petronas until end of the contract period or 1Q14. Management guided that Naga 3 will undergo final repairs in Labuan for 2-3 weeks after its terms with Petronas ended before moving to Vietnam.

Management is targeting Vios sales to reach 36,000 units or 3k per month in FY14, after it has achieved orders of 16,000 units since it opened for booking in July. Toyota is expected to launch the new CBU Altis by end 1Q14 (from Thailand), as well as targeting Hybrid Camry and possibly another new model (still in discussion with Toyota Motor).

We expect stiff competition in 2014, as rivals (namely City, Almera, Attrage etc) for the new Vios are likely to be aggressive in order to capture market share ahead of the implementation of GST in early 2Q15. The new Altis is likely to face competition from the launch of new Sylphy and Mazda 3 (expected to be CKD) in 2014.

Furthermore, any depreciation of RM will increase operational cost (60% of the cost denominated in US$) and affect the margins of Toyota (51% owned by UMW).

UMW is eager for new opportunities especially in the engineering and manufacturing division. Management hinted that it is prepared for M&A exercise to expand the division. It has recently signed a 10 years contract with Repsol, as well as entered into JV with Bluebird Group of Indonesia, which has a large taxi fleet in Indonesia.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.

Forecasts

Unchanged

Rating

Hold

Positives – 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; 2) Strong growth of Oil & Gas division; and 3) Expanding reach of Manufacturing & Engineering division into fast growing China and India.

Negatives – 1) High crude oil prices affecting margins of its oil based products i.e. lubricants; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.

Valuation

Maintained Hold with unchanged Target Price of RM12.25 based on SOP.

Source: Hong Leong Investment Bank Research - 26 Nov 2013