We came away from UMW Holdings (UMW)’s 4Q13 results briefing with our NEUTRAL stance intact as we believe that its main revenue contributor - Auto segment (contributing c.68% to the group's FY14E revenue) will continue to face margin compression going forward amidst stiff competition despite the expected higher vehicles sales in FY14 on the back of encouraging responses for its new Vios. While we see no major excitement from the Equipment as well as the M&E divisions, we are feeling upbeat on the organic growth of O&G segment underpinned by the delivery of NAGA 5 in May with confirmed contract with NIDO Petroleum Philippines and upcoming NAGA 6 that will be delivered in September and a contract expected to be secured prior to delivery. Post briefing, we have trimmed our FY14E and FY15E earnings by 3.5%-4% to mainly account for: (i) lower vehicle sales assumption of 97.9k-100.0k units in FY14-FY15 (from 102.5k-104.6k units respectively) taking cues from management forecast of 98k in FY14 and (ii) lower EBIT margin assumption in the Automotive segment assuming higher A&P expense and discounts in light of the stiff competition from other players. Our SoP-derived TP is now reduced from RM13.16 to RM12.25 which implies FY14 PER of 15.2x, close to +1.0SD above the average PER mean. Maintain MARKET PERFORM.

Further details on its FY13 results. The group reported 4Q PATAMI of RM109.1m, taking its FY13 PATAMI TO RM681.2m. However, on an adjusted basis, normalised PATAMI was actually RM880.6m after adjusting for the non-core items totalling RM199.4m comprising of: (i) RM41.5m for the gain on disposal of properties for the O&G division, (ii) -RM112.8m for the impairment of goodwill in India, (iii) –RM128.5m on derivatives loss and others immaterial non-core items totalling to RM0.4m. Management noted that there will not be no more significant impairment losses going forward as most of them have been adjusted in FY13. On its 4Q13 results, by taking a closer look on a QoQ basis, the decent 4Q13 PATAMI growth of 7.6% was mainly driven by the Automotive division on the back of the new launching of Vios model in October 2013. Of noteworthy, order for the new Vios is encouraging with a total cumulative order of c.20k units. However, YoY the group’s PATAMI was mainly halved by lower bottomline contribution in Automotive (normalisation from high base in 4Q12 where more new models were being launched) and M&E divisions (due to the current downturn of the automotive industry in India).

Higher sales target for Automotive division. The group has forecasted the combined total sales from UMW Toyota Motor (98.4k units) and Perodua (197k units) to achieve 295.4k units. We understand that the UMW Toyota Motor target of 98.4k which is a tad higher than the FY13’s actual sales unit of 91.2k will mainly be driven by the new Vios. With current encouraging bookings of >10k units for Vios, management believes that it could achieve sales unit of c.33k for this year. Meanwhile, on our take, while we are keeping an unchanged total sales assumption of c.31k annually for Vios which constitute 30% of total Toyota sales assumption based on its historical sales trend, we have lowered our previous FY14 vehicles forecast of 102.5k units which is a tall order for UMW Toyota Motor to 97.9k units to align with management guidance while keeping our Perodua sales forecast of 198k units unchanged. On the margin side, while management did not paint a detailed picture on the quantum and direction of sales margin, we reckon that FY14 could be another challenging year in view of the cost push inflationary factor as well as stiff competition that might suggest further margin compression.

Resilient earnings growth in Oil & Gas segment make up for the shortfall in other segments. While we see no major excitement from the Equipment as well as the M&E divisions, we are feeling upbeat on the organic growth of O&G segment underpinned by (i) the delivery of NAGA 5 in May as well as the confirmed contract with NIDO Petroleum Philippines for a duration of six weeks with a contract value of c.USD7m, (ii) the higher daily charter rate from Naga 2 in the 2H14, (iii) ongoing contracts for Naga 1, Naga 3 and Naga 4 and, (iv) upcoming NAGA 6 that will be delivered in September with contract expecting to be secured before then. All in, we are expecting its subsidiary UMWOG to register a NP of RM291m in FY14 and RM467m in FY15.

Our take post 4Q13 briefing. Our FY14E and FY15E earnings are reduced by 3.5-4% to mainly account for: (i) lower vehicle sales assumption of 97.9k units from 102.5k units in FY14 and (ii) lower EBIT margin assumption in the Automotive segment assuming higher A&P expense and discounts in light of the stiff competition from other players. Our SoP-derived TP is now reduced from RM13.16 to RM12.25, which implies a FY14 PER of 15.2x, close to +1SD above the average PER mean. Maintain MARKET PERFORM.

Source: Kenanga