UMW’s  1Q14  results  were  broadly  in  line  with  expectations.  As expected,  the  main  growth  drivers  for  earnings  came  from  its automotive and O&G divisions. There appears to be no quick fix for the motley  collection  of  businesses  in  the  “Others”  division  that contributed  a  net  loss  of  MYR29.3m  for  the  quarter.  Core  earnings growth remained muted. Maintain NEUTRAL and MYR11.30 FV.

• Broadly in line. UMW’s 1Q14 net profit of MYR235.5m was 7.2% higher y-o-y,  reaching  26.9%  of  our  2014  forecast  and  24.2%  of  consensus estimates.  Sequentially,  after  adding  back  non-recurring  asset impairment charges  and  forex  losses  to 4Q13 ’s  adjusted earnings,  net profit  was  17.3%  higher.  Revenue  for  the  quarter  rose  6.7%  y-o-y  to MYR3.58bn,  but  was  7.9%  lower  q-o-q.  Consolidated  EBIT  margin during  the  quarter  normalised  to  12.1%  from  7.8%  in  4Q13  (nonrecurring  costs  and  year-end  automotive  discounting)  and  11.8%  in 1Q13. The effective tax rate of 18.2% was also lower-than-expected due mainly  to  the  reversal  of  deferred  tax  expenses.  We  did  not  note  any material non-recurring charges during the quarter.
• Automotive  still  the  earnings  backbone.  UMW’s  automotive  division contributed  74%  and  85%  of  group  revenue  and  pretax  profit respectively. Segment revenue rose 11.1% y-o-y  but was down  7.3% qo-q,  in line with  Toyota’s  sales volume of 68,658 units  (+21.0% y-o-y,  -10.7% q-o-q).  The y-o-y gain was due to the strong demand for the allnew  Vios  and  Corolla  Altis,  while  the  sequential  decline  was  due  to seasonal  factors.  Associate  contributions  mainly  from  38%-owned Perodua  were  in  line  with  expectations.  O&G  revenue  was  steady sequentially  but  up  24.2%  y-o-y  given  new  contributions  from  NAGA-4 beginning  Apr  2013,  improved  charter  rates  for  NAGA-2  and  higher utilisation of NAGA-1. Equipment revenue declined 9.3% y-o-y, attributed to  weaker  commodity  prices  in  Papua  New  Guinea  and  the  continued suspension  of  mining  activities  in  Myanmar  that  affected  demand.Manufacturing and engineering revenues were flat.
• Forecasts and risks. Our forecasts are unchanged. The key risk is from more cautious consumer spending patterns affecting car sales.
• Investment  case.  Our  SOP-based  FV  of  MYR11.30  is  unchanged,derived from valuing its auto business at  a 12.5x P/E and its 55%  stake in  UMWOG  at  a  consensus-based  valuation  of  MYR4.50.  We see  few near-term rerating catalysts until there is better clarity on  the company’s strategic growth direction. NEUTRAL call maintained.

Source: RHB