We  maintain  our  NEUTRAL  rating  on  the  stock  but  trim  our  TP  to MYR11.00  (2.7%  downside)  after  UMW  reported  relatively  soft  3Q14 earnings  that fell below expectations. UMWOG’s earnings are expected to  grow  in  tandem  with  the  deployment  of  new  drilling  assets  while hopes are high for higher equipment sales to Myanmar. The stock looks close to being fairly valued given the recent de-rating of its O&G assets. 

A  softer  3Q14.  UMW  reported  a  relatively  weak  3Q14.  While  O&G earnings  were  broadly  in  line,  the  other  three  main  divisions  all disappointed.  The  non-core  division  reported  a  stable  pre-tax  loss  of MYR32.4m for the quarter. Cumulative 9M14 earnings only reached 62% of  our  and  consensus  estimates  respectively.  No  significant  nonrecurring  charges  were  incurred  during  the  quarter.  A  second  interim DPS of 15 sen was declared, bringing the cumulative DPS to 25 sen. 

UMWOG in line. UMW Oil & Gas UMWOG’s 9M14 revenue grew 29.8% on  the  back  of  higher  rig  utilisation  and  rates  for  NAGA-2,  higher utilisation for NAGA-3, full contributions from NAGA-4 and a full quarter’s contribution from MAGA-5 which commenced operations in May 2014.

Other  business  divisions  were  weaker.  Toyota  sales  for  the  quarter fell  12.6%  sequentially  owing  to  competition  from  new  Honda  models although  cumulative  Toyota  sales  are  still  16.8%  higher  YoY  from  te introduction  of  the  new  Altis  and  Vios  models  in  early  2014.  Theequipment  business  was  flat  as  the  ban  on  jade  mining  activities  was only  lifted  on  1  Sep,  while  softer  commodity  prices  adversely  affected sales  in  Papua  New  Guinea.  The  mechanical  and  engineering  unitreported  a  small  cumulative  profit  compared  with  a  loss  in  9M13  from asset impairment charges.

Risks and forecasts.  The main risks are  unfavourable exchange rates and  weaker  auto  sales.  After  updating  our  assumptions,  we  trim  our 2014-2015 earnings estimates by 4.9% and 4.3% respectively. We also introduce our 2016 forecasts.

Maintain  NEUTRAL  We  maintain  our  NEUTRAL  call  on  the  stock  but cut our SOP-derived TP to MYR11.00 (from MYR12.40) mainly to reflect the recent de-rating of the O&G sector after the plunge in crude oil prices (see Figure 5). We see few re-rating catalysts for the stock,  with modest growth expected at its key automotive division.

Source: RHB