We came away from the 4Q14 briefing with our NEUTRAL stance unchanged on the mixed outlook guided by management. While the prospect of its Automotive segment appears challenging in light of stiff industry competition as well as the bleak local economic outlook, we see the potential stronger Perodua sales (at associatelevel) to be the saving grace. On the O&G division, while we are cognisant of the headwinds amidst the prevailing low oil prices (thus leading to softening charter rates to rigs players), its healthy orderbook as well as potential future contracts should alleviate concerns on the immediate term. Meanwhile, other divisions should also perform better compared to 2014 with narrower losses following a series of restructuring exercises. With a mixed outlook coupled with the lack of immediate re-rating catalyst, we maintain our MARKET PERFORM rating with an unchanged SoP TP of RM11.00 (which implies a FY14 PER of 14.0x, at its average PER mean).

Lower sales target guided for UMW Toyota. Management guided a combined total sales of 304k units from UMW Toyota Motor (96k units) and Perodua (208k units) which are close to our forecasts (UMW Toyota: 98k units and Perodua: 205k units, totalling to 303k units). While the guidance implies a growth of 1.6%, which is generally in line with MAA’s 2015 TIV forecast of +2%, sales volume of the group’s core earnings contributor, UMW Toyota was forecasted to be lower by 7%. On a similar note, management also sounded more cautious for the prospects in 2015 in view of the stiff industry competition as well as the bleak local economic outlook. While it is also our belief that Toyota could lose ground to its competitors with lack of new attractive models launching in 2015, the saving grace could be the stronger Perodua sales on the back of Perodua Axia and MyVi. On the margin side, while management was reluctant to elaborate on the direction of sales margin, we see margin compression to be the key trend stemming from the fierce competition in the B-segment as well as the higher cost of sales for its imported CKD parts and CBU models.

Potential future contracts to be the silver lining for its O&G segment. While the sector is facing headwinds amidst the prevailing low oil prices (thus leading to softening charter rates to rigs players), management noted that the revenues from existing contracts as well as the potential future contracts should cushion shortfalls. We take comfort from management as we understand that the company’s outstanding orderbook is still healthy at RM1.8bn (as of Dec14). Although five of UMW O&G rig’s contracts (for NAGA 2, 3, 5, 6 and 7) will expired in 2015, we believe the expiration of nine foreignowned rigs in 2015 (out of 16 rigs in Malaysia) should pave the way for the five rigs. Additionally, NAGA-8 which will be taken delivery in Sept 15 should also partly cushion the downside. Note that we have accounted all these in our FY15E UMWOG's NP.

Mixed outlook on other divisions. On the Equipment segment, while the outlook remained challenging with commodity prices staying at the current low level, we believe the resumption of mining activities in Myanmar which led to RM200m contracts secured to supply Komatsu equipments to its major customers (Please refer to our report titled: Headway in Myanmar in Aug14 for further details) will mitigate the impact. Touching base on the M&E segment, management believe that the growing lubricant business will mitigate the challenging auto components manufacturing business in Malaysia Meanwhile, other Non-core divisions should post narrower losses following a series of reorganisation and restructuring plans (especially on its Auto component business in India, please refer to the report titled: Exiting Auto-component Industry from India in July14).

Our take post 4Q14 briefing. We leave our FY15E and FY16E earnings unchanged as our forecasts are intact at this juncture. Maintain MARKET PERFORM call with SoP-derived TP of RM11.00 (which implies a FY15E PER of 14.0x, at its average PER mean) unchanged.

Source: Kenanga