The operating environment for UMW’s auto and equipment divisions is looking  brighter,  helped  by  the  steady  domestic  economic  growth,coupled  with  the  resumption  of  jade  mining  in  Myanmar.  UMW  Oil  & Gas  is  also building scale with the delivery of new drilling assets. We believe the improved prospects in 2015 are already in the price and that a NEUTRAL call is appropriate. FV is MYR12.40 up from MYR11.30.

Reported  earnings  weighted  down  by  non-recurring  loss.  UMW’s 1H14 reported net profit of MYR377.5m declined  19.8% y-o-y and only reached 43% of our previous 2014 estimate. The main deviation was the provision  for  an  expected  loss  of  MYR93m  arising  from  the  proposed disposal  of  investments  in  automotive  component  companies  in  India. Adjusting for the non-recurring loss, core earnings were slightly ahead of our  forecasts  but  broadly  in  line  with  consensus  estimates.  An  interim DPS of 10 sen was declared (1H13: 10 sen).

Core  margins  stable.  1H14 revenue  rose  10.1%  y-o-y  to MYR7.55bn with  the  growth  coming  mainly  from  the  automotive  and  oil  and  gas (O&G) businesses. Automotive revenue rose 12.0% y-o-y on the back of a 17.3% y-o-y increase in Toyota’s  sales volumes,  following the launch of  the  new  Vios  and  Altis  models.  O&G  revenue  was  up  33.5%  y-o-y,helped by the full contributions from NAGA 4, higher daily charter rates, higher  utilisation  and  contributions  from  NAGA  5  from  May.  The equipment  division  was  hampered  by  tough  industry  conditions.  The manufacturing & engineering (M&E)  division reported stronger earnings arising  from  forex  translation  gains.  Associate  contributions  declined 17.2% y-o-y due to continued losses at WSP, USTPL and its China pipe businesses,  but  supported by stable earnings at Perodua.  Management expects Toyota’s  sales to  be stable in 2H14 and show modest growth in 2015  despite  severe  competition  from  Honda.  The  O&G  segment  may also grow from the delivery of more drilling assets, while the equipment business should benefit from the resumption of jade mining in Myanmar.

Forecasts and risks. We raise our 2014-15 recurring net profit by 5.4% and  10%  respectively.  Key  risks  to  our  recommendation  are  weaker consumer sentiment and unfavourable forex fluctuations.

NEUTRAL.  We retain our NEUTRAL call but raise our SOP-derived FV to MYR12.40 (from MYR11.30) after updating our valuation parameters. While 2015 is looking like a better year for UMW, we  remain concerned about  the lack of clarity on management’s plans to turn around the loss making “Others” division.

Source: RHB