Highlights/ Comments

In  view  of  lower  midterm  oil  price    at  US$80-90/bbl (from  >US$100/bbl),  negative  sentiment  and lack of sizeable contract  newsflow  for  upstream  sector,   our  O&G  analyst believe  that  O&G  sector  no  longer  command  premium Valuation (Refer  to  O&G  sector  report  dated  20  Oct  2014).

Thus,  HLIB  has  cut  the  targeted  P/E Valuation for  UMWOG to  16x  (from  20x)  with  lower  target  price  of  RM3.29  (from RM4.12).

Given  the  weak  global crude oil price,  oil majors might  slowdown  (or  reduce)  capex  on  new  projects  which  will  negative impact   E&P  companies  including  UMWOG,  which  provide drilling  services.

Decreasing  oil  price  coupled  with  lack  of near term sizeable contracts  newsflow  for  local  upstream  sector  (including drilling  services  –  UMWOG)  will  dampen  investor’s sentiment.

Risks

• Prolonged  tightening of banks’ HP rules.
• Slowdown  in the Malaysian economy affecting  car sales.
• Global automotive  supply chain  disruption.
• Appreciation  of US$.
• Plunge in crude oil price and slowdown  in O&G exploration.

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

Following  our  O&G  analyst  cut  in  UMWOG  target  price,  we cut  our  target  price  of  UMW  to  RM11.43  (from  RM12. 28) based on SOP.

Source: Hong Leong Investment Bank Research - 27 Oct 2014