News  In a media release, UMW Holdings (UMW) announced that its wholly-owned subsidiary, UMW Engineering Services Limited, has secured contracts worth c.RM200m to supply more than 60 units of Komatsu equipments to its three major Myanmar customers involved in the jade mining industry in Hpakant, Myanmar.

Comments  We are POSITVE on the news as: (i) the revenue contribution of these contracts are relatively significant to the group’s Equipment division (>10% of our previous FY15E revenue assumption in Equipment division), (ii) this announcement also includes the lifting of suspension of jade-mining in Myanmar (effective 1 September 2014), which could signify more growth potential with more orders in the future for its Komatsu equipment given its strong foothold of supplying equipments to the jade mining industry in Myanmar.

 To recap, jade-mining activities in Myanmar were previously suspended in May 2012 due to security reasons, causing slower demand for equipments which had dragged down earnings growth in the group’s Equipment division.

Outlook  For FY14, the group had in the last quarter forecasted the combined that the total sales from UMW Toyota Motor at 295.4k units (+3%), a forecast which is shared by us (295.9k units, +3%). Despite a higher sales forecast, we are expecting margin to decline in view of the cost push inflationary factor as well as the stiff competition, particularly in the B & C segment.

 On the Oil and Gas segment, it is noteworthy that UMWOG is set to receive three new jack-up rigs in FY14 which we believe should be able to secure contracts given that there are at least 17 rig contracts expiring from mid-2013 to 2015. Note that we have already factored these potentials into our estimates.

Forecast  The earnings from these contracts (with EBIT margin assumption at c.10%) are likely to be recognised starting from FY15 as we gathered that the equipments delivery will only commence from 4Q14, with a delivery period within six months.

 Hence, we raised our FY15E core NP estimates by 5.5% to account for: (i) the earnings contribution from the abovementioned equipment-supply contracts, (ii) the adjustment for the disposal of Auto components in India, which was recorded at a loss of RM40m in FY13.

Rating Maintain MARKET PERFORM

Valuation  We raised our TP to RM13.93 (from RM12.25) which is based on a SoP valuation as we roll forward our valuation basis year from FY14 to FY15 (implies 15.2x FY15 PER, close to +1SD above the average PER mean).

Risks to our call Lower-than-expected vehicle sales.

Source: Kenanga