We came away from the 1Q14 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 higher vehicles sales which will be driven by its new Vios and Altis. 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 mainly driven by: (i) the ongoing contracts for Naga 1, Naga 3 and Naga 4 and (ii) the upcoming 3 new jack-up rigs in FY14 which we believe should be able to secure contracts given that there are at least 17 rig contracts that are expiring from mid-2013 to 2015. Post-briefing, with all of our assumptions intact, we leave our FY14E and FY15E earnings estimates unchanged. Maintain MARKET PERFORM with an unchanged SoP TP of RM12.25 (which implies a FY14 PER of 15.2x, close to +1.5SD above the average PER mean).

Highlights on its 1Q14 results. On a closer look, QoQ, while the group's 1Q14 revenue remained relatively unchanged, normalised PATAMI declined by 5% with the culprit being the losses in the Other segment. Delving deeper, this was mainly attributed to the lacklustre demand for the group's non-core Oil & Gas transmission pipe amidst the slowdown in major projects in China and Oman. Meanwhile, in the Automotive segment (contributed c.78% of the group's total revenue), revenue managed to inch up 1.5% QoQ despite the seasonally weaker sales in Toyota (-11%) and Perodua (-10%) respectively, thanks to the strong performance in Aftersales segment (at c.30% of total Auto segmental revenue.)

Unchanged sales target for Automotive segment. Management remained optimistic that the group's combined total sales of 295.4k units from UMW Toyota Motor (98.4k units) and Perodua (197k units) are achievable despite the stiff competition in its B & C segment. Besides being driven by the new launching of its flagship models such as Vios and Corolla Altis, management also noted that the key strategy will hinge on the customers loyalty programme that they are currently working on. Meanwhile on our take, we are keeping our FY14 vehicles sales forecast of 97.9k units for Toyota and 198k units for Perodua, which are close to the management’s numbers. On the margin side, while management did not provide details 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 to cushion the shortfalls 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 6 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 3 new jack-up rigs in FY14 which we believe should be able to secure contracts given that there are at least 17 rig contracts that are expiring from mid-2013 to 2015. Noteworthy, all these have been accounted in our UMWOG's NP forecasts of RM291m in FY14E and RM467m in FY15E, respectively.

Our take post 1Q14 briefing. We leave our FY14E and FY15E earnings estimates unchanged as our forecasts are intact at this juncture. Maintain MARKET PERFORM call with SoP-derived TP of RM12.25 (which implies a FY14 OER of 15.2x, close to +1SD above the average PER mean) unchanged.

Source: Kenanga