Highlights / Comments

FY14 sales target of 100k units (Toyota and Lexus) was maintained, despite the current highly competitive market conditions. Oct YTD, they have achieved 83.9k units (83.9% of target), with remaining 2 months to achieve 16.1k units, likely at the expense of margins due to higher marketing and promotional expenses (including discounts).

It is also upbeat on Perodua’s FY14 sales target of 1 93k units (Oct YTD recorded 158k units), given the strong demand for Axia. As of 24 Nov, it has achieved 54.1k orders and delivered 16.4k units. At the meantime, promotions are being offered to boost sales for MyVi and Alza. Expect stronger Perodua contribution in 4Q14.

Equipment Earnings expected to pick-up in 4Q14, with new contribution of newly secured RM200m contracts to supply 60 units of Komatsu heavy equipment to Myanmar jade mining operation. Furthermore, domestic demand for heavy equipments in 2015 is expected to be sustainable from the on-going infrastructure projects.

UMWOG is facing potential lower charter rates, given the current low international crude oil price (below US$80/bbl), but remained bullish on the demand for its fleet of jack -up rigs . It also highlighted the need for Petronas to maintain oil exploration and production expenses in order to keep up oil production to finance government’s budget .

Other segment (including Valued Group Business) remained in the red in 3Q14, given the tough market conditions. T he turnaround may take longer than expected. YTD, the segment reported losses of RM41m from WSP; RM24m from Oman Drilling Services; RM20m from India USTP; and RM16m from China ZBSS and SBSW. Note that UMW also provided RM93 losses for the disposal of 3 India automotive parts and components manufacturing companies in 2Q14. Nevertheless, it is guiding for lower losses in FY15.

Forecasts

• 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) Slump in crude oil prices affecting demand and charter rates for jack -up rigs; 2) Tightening of bank’s lending rules ; and 3) Int ense competition from rival automotive marques.

Valuation

• Maintained HOLD with unchanged Target Price of RM11.30 based on SOP.

Source: Hong Leong Investment Bank Research - 28 Nov 2014