While UMW’s 1H13 earnings disappointed, we expect a slightly better 2H13 from higher Toyota sales and improved O&G earnings with all four rigs generating income. The MYR is a concern for margins if it continues to weaken. Despite a 10% share price decline in the past two weeks, we are still NEUTRAL, with a MYR12.70 TP. UMW declared a 10 sen interim single tier dividend (1H12: 10 sen).

- Below expectations.  UMW’s 2Q13 net profit of MYR251.0m rose 14.3% q-o-q and 11.9% y-o-y. 1H13 cumulative earnings fell below expectations, rising 5.9% y-o-y to MYR470.7m and reaching just 42% of our previous forecast and 44% of consensus estimates. The deviation was attributed to lower-than-expected Toyota sales, lower auto margins and lower-than-expected associate contributions.  

- Automotive division disappoints.  Automotive revenue fell 10.3% y-o-y due to lower Toyota vehicle registrations (-15.4% y-o-y) in 1H13. The disappointing volumes were due to the delayed launch of the all-new  Vios,  now scheduled for October compared to 2Q13 previously. The auto segment’s pre-tax margins for 1H13 slipped to 14.6% (1H12: 15.6%) due to run-out discounts offered for the outgoing Vios model.

- O&G and equipment revenue down. O&G revenue declined 24.1% y-o-y due to the expiration of a semi-submersible rig contract (Hakuryu-5) in Jan 2013. However, segmental profit expanded 56.5% y-o-y due to new contributions from NAGA-4, lower NAGA-1 repair costs and non-recurring gains from a property sale. Equipment revenue declined due to lower demand for parts and equipment that was attributed to a weak construction sector.

- Forecasts slashed. After paring our sales volumes to 98k (from 108k) units for 2013 and to 102K in 2014 (from 110k), and revising our average MYR/USD exchange rates to MYR3.20 (from MYR3.05) for both 2013 and 2014, we lower our earnings estimates by 13.6% 
and 9.4% respectively.

- TP cut.  We lower our TP to MYR12.70 (from MYR14.05) after revising our target P/Es in our SOP valuation to 12.5x, 20x and 10x (from 14x, 13x and 11x) for its auto, O&G and other divisions respectively. The auto P/E is a deserved premium to the sector - owing to Toyota and Perodua’s market leadership - but is lowered due to the weaker macroeconomic environment, while the higher O&G P/E is reflective of higher sector multiples. Risks include regulatory uncertainty, the weak MYR and financing restrictions.

Source: RHB