UMW’s 1Q13 earnings were broadly in line and we believe earnings will continue to improve in subsequent quarters. We reiterate our NEUTRAL call and raise our fair value estimate to MYR14.40 (from MYR13.15) after rolling forward our base year to 2014. The upcoming listing of its O&G division will continue to sustain investor interest in the stock.

- Weak quarter but in line with expectations. UMW’s 1Q13 net profit of MYR219.7m (-0.2% y-o-y and +5.8% q-o-q) was lacklustre reaching just 19.7% and 20.4% of our previous forecasts and consensus estimates respectively. We consider the results to be in line with expectations and expect stronger earnings in later quarters from higher Toyota sales volumes, higher associate contributions from Perodua from favourable exchange rates, a pick up in O&G earnings and improved equipment sales. Top line contracted 17.9% q-o-q and 9.2% y-o-y mainly from lower automotive revenue.

- Automotive volume down but margin up. Automotive revenue declined 21.5% q-o-q and 4.2% y-o-y on the back of weaker Toyota sales volumes caused by heightened competition in the market. However, segment pre-tax margin expanded to 15.4% (1Q12: 14.8%) helped by lower MYR/USD exchange rates, improved cost management and an improved sales mix. Lower demand from Myanmar resulted in equipment sales falling 22% y-o-y although segment margins improved from better efficiencies and increased high margin parts in PNG. O&G revenues declined due to lower contributions from NAGA-1 (refurbishment programme) and lower trading income.

-Stronger quarters ahead. We expect higher Toyota sales in 2H13 helped by new model launches that could include the new Vios and Corolla Altis. We are maintaining our 108,000 unit volume forecast. O&G earnings are also expected to improve going forward arising from the full contribution from NAGA-1, higher day rate for NAGA-2 and maiden contributions from NAGA-4.

- Acquiring new jack-up rig. UMW announced the acquisition of a fifth drilling rig for a total consideration of USD223m. The rig with the hull no. B340 is currently being constructed by Keppel FELS and is scheduled to be completed and delivered by May 2014. We understand B340 is of similar specification to NAGA-4 acquired last Jun for USD214m.

UMW Oil & Gas acquires new jack-up rig

UMW concurrently announced the acquisition of a fifth drilling rig for a total consideration of USD223m. The rig with hull number B340 is currently being constructed by Keppel FELS and is scheduled to be completed and delivered by May 2014. We understand B340 is of similar specification to NAGA-4 (NAGA 4 is an independent leg cantilever 400 feet B Class mobile offshore self-elevating drilling unit, with a water depth and drilling depth of 400 feet and 30,000 feet) that was acquired last Jun for USD214m.

Risks

These include 1) Weaker economy and tighter financing conditions crimping car sales; 2) Unfavourable forex trends; 3) Increased competition; and 4) Regulatory changes.

Forecasts

We make minor changes (+1.4-1.6%) to our forecasts after tweaking our assumptions. We have yet to factor in the listing of its O&G division pending the finalisation of the IPO price. UMW will still own 61% of UMW-OG post-IPO.

Investment case

No dividend was declared in respect of the quarter. Management reiterated that it intends to maintain their policy to distribute at least 50% of recurring net profit. We raise our fair value estimate to MYR14.40 (from MYR13.15) after rolling forward our base year to 2014. No change to our sum-of-parts target PERs of 14x, 13x and 11x for its auto, O&G and other divisions respectively. The upcoming listing of its O&G division will continue to sustain investor interest in the stock. Prospective PER of 13.7% is already at a premium to the three-year forward PER average of 11.7x. We believe the stock is close to being fairly valued and reiterate our NEUTRAL call.

Source: RHB