Results

Reported core net profit of RM174.9m in 2Q14 and RM386.7m in 1H14, in line with HLIB’s RM804.7m (48.1%), but below consensus RM944.3m (40.9%).

Deviations

None.

Dividends

Announced interim single tier dividend of 10 sen/share.

Highlights

Automotive: 2Q14 revenue increased by 9.3% qoq and 13.0% yoy on higher Toyota sales (new model Vios and Altis). Nevertheless, we expect stiff competitive market in 2H14, which may affect Toyota’s margin. Furthermore, Perodua sales is expected to be weak in 3Q14 (due to ending of Viva model in August), before strong rebound in 4Q14 from newly launched EEV-AXIA model.

Equipment: 2Q14 revenue improved marginally by 4.3% qoq and 2.1% yoy, due to continued soft demand from construction sector (project delays) and mining sector (weak commodity prices and license suspension). The lifting of suspension on Jade Mining in Myanmar effective Sep 2014, will likely boost the demand for mining equipment in 2015. UMW has won a contract to supply 60 units of Komatsu equipment in Myanmar worth RM200m.

Oil & Gas: 2Q14 revenue improved further by 22.1% qoq from the commencement of Naga 5 in May 2014 and improved HWU utilization, which was partly offset by the suspended Naga 3, which undergone scheduled maintenance in the quarter. Expect stronger earnings in 2H14 with the deliveries of Naga 6 and Naga 7.

Manufacturing & Engineering: 2Q14 revenue improved marginally by 3.8% qoq and 0.5% yoy mainly on sustained Malaysia and China operations, partly offsets by the weaker India operations. UMW has provided RM93m losses related to the Indian investments disposal by end 2014.

Risks

• Weakening of RM.
• 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 models, by cutting 4-5% of FY14-16 earnings forecasts, mainly in anticipation of lower margins from automotive segment from intensified competition.

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

In view of share price rallied near to our Target Price, we cut to Hold with lower Target Price of RM12.28 (previously RM12.55) based on SOP, due to the limited upside.

Source: Hong Leong Investment Bank Research - 28 Aug 2014