Highlights/ Comments

UMW share price had underperformed the KLCI since mid-2013 (See Figure #1-2) on concerns of Toyota sales disappointment and margin squeeze in 2014-2015.

Toyota reported only 14.3k sales in Jan-Feb (14.7% of FY14 targeted 97k units) mainly due to seasonal low demand (shorter working days) and consumer withholding purchases (before NAP 2014 announcement). Nonetheless, Toyota is facing competitive pressure especially from close competitors Honda and Nissan.

However, we believe the current share price of RM10.92 has already reflected the downside risk of UMW from 51% owned Toyota Malaysia (i.e. limited downside risk at current share price). We urge investor to relook into UMW’s potential earnings growth from:

1) Capacity expansion of Perodua (38% associate) to 400k units p.a. by mid-2014. The new plant is equipped with Daihatsu’s latest technology for higher efficiency and lower defective rate to 0.05% (world standard) vs. current 0.06-0.08%. Daihatsu’s new automatic transmission plant in Sendayan and supports for Perodua R&D investment, leads us to believe the potential export opportunity of Perodua (supporting Daihatsu growth in Asean). Perodua contributed ~RM208m (24%) to UMW’s 2013 core earnings.

2) UMWOG (55.2% subsidiary) earnings growth, from RM165m in 2013 to RM653 in 2017 (+300%), with additional 3 rigs (total 8 rigs) by 2015. UMWOG still have room to acquire more rigs from IPO proceeds.

3) UMW raised RM1bn from UMWOG listing in Nov 2013. Deducting RM200m for loan repayment, RM50m for listing expenses and RM117m for special dividend in 3Q13, UMW still have ~RM630. UMW indicated the proceeds for capital expenditure and asset acquisition (Manufacturing & Engineering). UMW is looking to expand the lubricant business (Malaysia, China and regionally) and expect automotive components turnaround (India) by 2015.

Risks

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

Forecasts

We have fine-tuned our model, we cut FY14 earnings by 6.3%, but increased FY15 and FY16 earnings by 1.5% and 12.0% respectively.

Rating

BUY

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

In view of the recent plunge in share price, we upgrade our recommendation to BUY with higher Target Price of RM12.55 (from RM12.40) based on SOP.

Source: Hong Leong Investment Bank Research - 31 Mar 2014