Highlights/ Comments

• During Petronas media briefing, management announced 15-20% cut in its 2015 capex due to the slump in crude oil market price (WTI @ US$61/bbl; Brent @ US$64/bb). Petronas will only review its capex if oil price rebound back to US$80/bbl level.

• As HLIB expect oil price to stay weak in the near term and coupled with lack of near term sizeable contracts newsflow for local upstream sector (from Petronas), we have downgraded the overall P/E valuation for O&G sector, from the continued weak investor sentiment on the sector (refer to HLIB O&G sector reported dated 01 Dec 2014).

• We are concerned about the potential drop in charter rates and lower utilization rates for UMW’s existing 7 jack -up rigs (5 contracted rigs expiring in 2015) and upcoming Naga 8.

• Consequently, UMWOG target price has been cut from RM2.90 to RM2.47 (P/E cut from 16x to 14x).

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 TIVwith 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 demandand charter rates for jack-up rigs; 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 RM10.86 (from RM11.30) based on SOP.

Source: Hong Leong Investment Bank Research - 11 Dec 2014