UMW’s 9M13 earnings fell short of expectations, although 4Q13 core earnings should improve as Toyota sales normalise. O&G earnings should continue gaining traction in 2014 – helping to drive core earnings higher off a low base, although we expect this is already priced in at 14.4x 2014 P/E. Second interim and special interim dividends were declared totalling 25 sen. Maintain NEUTRAL.

• Another disappointment. UMW’s MYR101.5m 3Q13 earnings were below expectations (-59.6% q-o-q; -66.1% y-o-y). Cumulative 9M13 profit of MYR572.1m reached just 59%/57% of our/consensus estimates on lower automotive sales during the quarter, asset impairment and unrealised forex losses on USD loans in India, and a worsening of the performance of its non-core oil & gas (O&G) businesses retained within the group.
• In between models. 9M13 automotive revenue fell 12.7% y-o-y on the back of a 16.3% decline in new Toyota vehicle registrations. Accordingly, segment pre-tax margins slipped to 13.8% for the period from 16.2% in 9M12.
• O&G earnings in line. O&G revenue declined 11% y-o-y due to the expiration of a semi-submersible rig contract (Hakuryu-5) in Jan 2013 in addition to lower trading income. However, segmental profit doubled as a result of new contributions from NAGA-4, higher NAGA-1earnings and non-recurring gains from a property sale. Equipment earnings were stable despite a softer topline helped by improved margins and non-recurring gain on derivatives. Manufacturing & engineering (M&E) revenues improved 8.1% y-o-y, but the division recorded a MYR24.3m pre-tax loss from asset impairment and forex losses.
• Core earnings lowered.We cut our core earnings forecast for 2013 by 17.4% after lowering our Toyota sales volume to 91,000 (from 98,000), factoring in higher non-core O&G losses, M&E impairment losses and assuming the MYR51.5m UMWOG IPO fees are provided for in 4Q13. Reported net profit is raised to MYR2.08bn after including the MYR1.28bn gain from the UMWOG IPO. 2014 earnings are tweaked lower by 5.7% after updating our forecasts.
• Maintain NEUTRAL. We maintain our NEUTRAL call and lower our SOP-derived TP to MYR12.50 (from MYR12.70). Target P/Es for the auto and other businesses in our SOP valuation of 12.5x and 10x respectively are unchanged. The auto P/E is a deserved premium to the sector – owing to Toyota and Perodua’s market leadership. The 61% stake in UMWOG is valued at our FV of MYR3.43 per share.

Financial Exhibits

SWOT Analysis

Company Profile 
UMW is the largest company in the automotive sector and is a component stock of the FBM KLCI. Its 51%-owned subsidiary UMWToyota imports, assembles and distributes Toyota and Lexus vehicles in Malaysia. Its oil & gas division was listed on 31 Oct 2013.

Recommendation Chart

Source: RHB