We attended an analysts’ briefing that revealed little by way of new information to alter our investment opinion on UMW. Key 2014 earnings growth drivers will come from its automotive and oil & gas (O&G)divisions. We think the stock is close to being fairly valued with a sustainable 60 sen dividend implying a reasonable 4.8% yield. Maintain NEUTRAL and MYR12.50 TP.

• Automotive division still the mainstay. UMW’s automotive division will continue to be its core business. Toyota sales volumes are set to bounce back in 2014 after sales this year were adversely affected by the delay in the launch of the new Vios. New models in the pipeline include the Corolla Altis(1Q14) and Camryhybrid, while the Hiluxtruck and Innova multi-purpose vehicle (MPV) are also due for replacement. Nonetheless, we note that 2014 sales will be tempered by stiff competition in the market and an increasingly stretched consumer, ie rising inflationary and interest rates, higher fuel costs and electricity tariffs, forthcoming goods and services tax (GST) implementation and high household debt levels.
• 2014 O&G profits to grow 82%.UMW Oil & Gas Corp (UMWOG MK, NR)’s 2014 earnings will grow 82% y-o-y helped by a full year’s contribution from NAGA-4and about six months from NAGA-5. We also expect a new asset to be added in 2014. Management confirmed that the O&G industry continues to be robust going into 2014.
• Non-core O&G business still a wild card. We understand the weak performance of its non-core O&G business was due to non-recurring impairment charges. Management was vague about the division’s prospects too.
• Investment case. We reiterate our NEUTRAL call and SOP-derived TP of MYR12.50. 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

3Q13 Results Briefing 
Automotive division still the mainstay

UMW’s automotive division will continue to be the group’s core business. Toyota sales volumes are set to bounce back in 2014 after sales this year were adversely affected by the delay in the launch of the new Vios. New models in the pipeline for 2014 include the Corolla Altis (1Q14) and the Camry hybrid. The Hilux truck and Innova MPV are also due for replacement. Nonetheless, we note that 2014 sales volumes will be tempered by stiff competition in the market place and an increasingly stretched consumer (rising inflationary pressure and interest rates, higher fuel costs and electricity tariffs, forthcoming implementation of the GST and already high household debt levels). The likely end of the tax holiday for hybrid vehicles after this year will also adversely affect UMW. The new national automotive policy (NAP) is expected to only extend the tax exemption for locally assembled hybrid cars. Currently, only the Camry hybrid has the potential economies of scale to be considered for local assembly. The discrete body styles of the Prius and Prius C means that total sales volumes cannot justify completely knocked down (CKD) operations. The elimination of duty exemptions will likely result in significant price hikes for Toyota’s hybrid offerings rendering them price uncompetitive. Only Honda 
currently locally assembles a hybrid model (Jazz), although Tan Chong is believed to be planning CKD operations for its Serena S-Hybrid MPV. Perodua sales should also continue to expand with the commissioning of its new plant and the launch of the new Viva in 2H14.

O&G profit to grow 82% in 2014. 
UMWOG’s 2014 earnings will grow 82%y-o-y, helped by a full year’s contribution from NAGA-4 and about six months from NAGA-5. We also expect an additional asset (yet to be announced) to be added in 2014. Management confirmed that the O&G industry continues to be robust going into 2014, driven by enhanced oil recovery initiatives, marginal field development and exploration & production (E&P) activities in new fields and brown fields. Contracts for 12 foreign-owned rigs will expire next year with the potential of being replaced by locally-owned assets.

Non-core O&G business still a wild card 
The “others” division comprises mainly of non-core O&G businesses that were excluded from the UMWOG IPO and includes businesses in India and China. The bulk of the MYR128.2m pre-tax loss for this division is believed to have been a result of a large goodwill impairment charge relating to its business in India, in addition to forex losses arising from the depreciation of the INR. However, there was no comment on this division in the notes to the accounts, while management only offered vague answers and was reluctant to go into details when questioned during the briefing.

Equipment and M&E Division 
The manufacturing & engineering (M&E) division was also adversely affected by forex losses relating to the depreciation of the INR, incurring a MYR31.1m pre-tax loss for the quarter. However, management reports that its core lubricants business remains stable and contributed positively. The equipment division reported weaker revenue during the quarter due to the softer construction sector and was not helped by weak commodity prices. However we think the equipment division is poised to perform better in 2014, as infrastructure projects in Malaysia shift up a gear and gain further traction. Management revealed that it is planning for the equipment and auto components businesses to be the next growth area for the group.

Risks 
These include: i) a weaker economy and tighter financing conditions crimping car sales, ii) unfavourable forex trends, and iii) increased competition.

Investment case 
We reiterate our NEUTRAL call and SOP-derived TP of MYR12.50. 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 the sector that is justified by Toyota and Perodua’s market leadership. The 61% stake in UMWOG is valued at our FV of MYR3.43 per share. The stock looks close to being fairly valued.

Financial Exhibits

Recommendation History

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.

Source: RHB