Highlights/ Comments

• UMW’s flagship Toyota sales (51% subsidiary) remained disappointing at 16.2k units (-32.8% yoy) in 1Q15 due to stiff competitions (aggressive sales campaigns by competitors), new launches by competitors and consumers’ negative sentiments (withholding vehicle purchases). CEO Datuk Ismet has lowered down Toyota sales target for FY15 to 90k units (from 100k units) vs. HLIB assumptions of 95k units. Furthermore, Toyota margins are affected by the strengthened US$ YTD.

• Newly launched Toyota Camry Hybrid 2.5L is attractively priced at RM175k, targeted for 7k sales in FY15. However, the car price may increase significantly to RM250k when the tax-exempt status end by end 2015. We believe there is high chance that Government-MITI will extend the taxexempt status as various OEMs have only officially started the program in mid-2014 and launched their CKD hybrid model by 2015 (except Serena Hybrid at end-2014).

• Nevertheless, Toyota downtrend is partially mitigated by strong Perodua sales (38% associate). Perodua achieved record quarter sales of 57.2k units (+29.8% yoy) in 1Q15 due to strong demand for Axia. They are confident of targeted 208k sales (vs. HLIB assumptions of 203k units) for 2015. Perodua has launched new campaign for fitting of accessories, which fetch higher margins.

• Regarding UMWOG, it’s facing declining charter rates and competitive pressures due to cost-cutting measures by oil majors. Hence, margins are likely to be affected in the near term as long as global oil price staying below US$80/bbl.

• We believe the downside for UMW is limited given the ability of UMW to maintain their dividend payout 50% of net profit or circa 4% dividend yield. Note that UMW is still retaining large part of the RM1bn cash proceeds from UMWOG IPO listing (Nov 2013). We understand that UMW is actively pursuing new investment opportunity to add value to the group, while diversifying the group’s earnings.

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; and 2) 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) Intense competition from rival automotive marques.

Valuation

Maintained HOLD with unchanged Target Price of RM10.75 based on SOP.

Source: Hong Leong Investment Bank Research - 30 Apr 2015