We keep UMW as our top auto pick although its share price has surged 59% YTD, making it the top gainer on the FBM KLCI. The group's prospects promise to be exciting as it emphasises cost cuts while pouring in more capex to boost the localization rate at its auto unit. The turnaround and potential listing of its O&G business could perk up its valuation and pave the way for rerating at a higher PE multiple of 14x, just like the heydays in FY06 when this division's profits accounted for 20%-30% of UMW's total earnings. We maintain our BUY call, with an unchanged RM12.45 FV.
Aggressive promotions and increasing localization. As part of its 30th-anniversary celebrations, UMW has been aggressive in its promotions offering downpayment rebates of RM3k on top of its standard sedan offerings. At such discounts, the price difference between its best selling model, Vios, and the cheaper Nissan Almera would shrink from an average 8.5% to 4.5%. This will boost its attempt to maintain its lead in the B-segment line-up. With heavy discounts bolstering sales and the delivery of the all-new Hilux and the ToyotaFortuner (order taking commenced in mid-August), UMW's 4Q vehicle sales are likely to improve sequentially and buck the seasonally weaker quarterly trend. The larger number of vehicles sold will give rise to economies of scale, thus boosting profit margins and offsetting the higher spending on promotions. UMW has made commitments to invest up to RM1bn from 2011 to 2013. The group has incurred an estimated RM700m from FY11-FY12, leaving RM300m to spend in 2013. We think the money would be used for upcoming model launches, such as the all-new Vios and Altis (due 2H2013) as the current models are nearing their end-of-life cycles. In pouring in such capex, UMW hopes to increase its localization rate ' now averaging 40% - to 50% in the next few years.
Potential listing of O&G biz. The media has reported that UMW could potentially list its O&G division sometime next year to raise USD500m following several divestments of its non-core O&G stakes. We see this as a possibility sometime by 3Q or 4Q 2013 ' at the earliest ' given that the O&G businesses are still undergoing revamps. While details of the IPO are unclear, we estimate that UMW's O&G businesses, which are more heavily focused on upstream drilling activities, could potentially fetch a PE multiple of at least 16x on FY13 earnings, representing a steep discount to Sapura Kencana's 21x. UMW may see its O&G earnings surge to RM148m from RM70m in FY12, driven by the full-yearcontributions of the Naga 1 and Naga 4, as well as improved utilization of its pipe manufacturing plants and higher charter rates for its onshore rigs in the Middle East. At 16x PE multiple, the group's O&G businesses could potentially command a market cap of RM1.74bn.
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Rerating catalyst. The potential listing of its O&G business could perk up the group's valuations, with a potentially solid turnaround boosting a rerating to higher PE of 13x-15x from an average of 12x, just like the heydays in FY05-06 when this segment contributed 20%-30% of UMW's total earnings. We maintain our BUY call, with an unchanged FV of RM12.45. Our sum-of-parts calculation gives an implied valuation of 11.7x.