We maintain our NEUTRAL call on UMW but trim our fair value to MYR14.05 (from MYR14.40) after updating our MYR/JPY assumptions. Quarterly earnings will trend higher driven by improved Toyota sales volume and improved contributions from the O&G division. Although P/E valuations are above its prospective three-year average of about 12x, the listing of its O&G division will help to sustain investor interest.

- Revising exchange rate assumptions. Comments by the U.S. Federal Reserve on QE tapering have triggered some volatility in exchange rates. RHB Economics notes that the MYR  is on a weakening bias and when capital flows normalise, MYR/USD will strengthen back to around MYR3.08 by end-2013. This volatility has rendered our previous MYR/JPY100 assumptions (2013: MYR2.96, 2014: MYR2.77) untenable. We are now revising our average MYR/JPY100 exchange rates for 2013 and 2014 to MYR3.10 and MYR3.00 respectively.

- JPY exposure mainly through Perodua. UMW’s JPY exposure stems mainly from 38%-owned associate Perodua. UMW-Toyota imported component purchases are mainly transacted in USD. In 2012, associate contributions only formed 8.3% of UMW’s pre-tax profit. Accordingly, shifts in Perodua’s earnings have a relatively limited impact on UMW. Our 2013-14 forecasts are revised lower by 1.2% and 2.1% respectively.

- Higher 2H auto sales volumes. Toyota sales volumes YTD May have been disappointing declining 16.9% y-o-y. This has been due to the impact of the Nissan Almera negatively affecting sales of the Vios that is reaching the end of its model life cycle. We believe the all new Vios due in 2H13 will help to redress the balance.

- Risks. The main risks to our call include: 1) Regulatory changes; 2) Tighter financing environment; and 3) Weaker economy affecting car sales.

- Investment  case. P/E valuations are above its prospective three-year average of about 12x, the listing of its O&G division will help to sustain investor interest. Our revised sum-of-parts derived fair value os MYR14.05. NEUTRAL.

Source: RHB