Highlights/ Comments

Higher contribution from automotive segment on stronger sales of Toyota, Lexus and Perodua (sales to dealers). Management indicated Toyota facing tough competition in the market especially with newly launched Honda City. Sales campaigns (higher cost) were launched to defend market share. New models Alphard and Previa (previously only available in grey import market) are offered to capture higher end market segment.

Perodua earnings improved +5% yoy in 1Q14. Management guided full year contribution may drop yoy when new production plant commenced operation in 2H14, due to high depreciation cost and low utilization. The new plant is expected to improve efficiency (lower unit cost production) and facilitate export long term strategy (complementing Daihatsu regional expansion).

Despite Perodua having to fund huge capex of RM2bn for its 5 years strategic planning (from internal funds), management does not expect the exercise to affect its dividend payout policy of at least 50% from PAT.

Equipment segment remained lackluster given the temporary stop work of jade mining in Myanmar and slowdown of gold mining (low gold price) in Papua New Guinea. UMW has strategized to supply construction equipment (Komatsu) into Myanmar and Malaysia (leverage to construction sector growth), as well as expanding leasing business (from current 30% contribution to 50%), which command higher margins.

The outlook for the Valued Group Business remained uncertain in 2014. Higher yoy losses for the segment was attributed by Zhongyou BSS (from RM6m profit in 1Q13 vs. RM4m loss in 1Q14), on slowdown in major pipeline projects in China. UMW is diversifying its business exposure outside of China such as US, Middle East and North Africa. UMW also indicated the potential of supplying pipes to the recently announced Russia signing gas supply to China.

Risks

• Weakening of RM.
• 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 BUY with unchanged Target Price of RM12.55 based on SOP.

Source: Hong Leong Investment Bank Research - 27 May 2014