UMW’s 1Q15 results were below expectations from a plunge in Toyota sales and disappointing earnings at UMWOG, offset by stronger heavy equipment deliveries. We reiterate our SELL call and cut our TP to MYR8.65 (19% downside). We expect headwinds to persist at these two key divisions. The stock trades at unjustified valuations well in excess of the historical average.

• A tepid 1Q15. UMW reported net profit of MYR165.2m for the quarter, reaching just 19.1% and 18.2% or our previous forecast and theconsensus estimate respectively. Earnings fell 29.9% YoY but nearly doubled QoQ due to heavy provisioning in 4Q14 at the “Others” division – a motley combination of disparate legacy non-core oil & gas assets that were left out of the 2013 listing of UMW Oil & Gas (UMWOG) (UMWOG MK, NR). The weaker earnings were attributed to the collapse in Toyota vehicle sales during the quarter, along with soft earnings at UMWOG – although this was offset by higher heavy equipment sales.
• Toyota sales plunge. Toyota unit sales for the quarter reached just 16,603 units (-40.3% QoQ, -32.6% YoY) on the back of severe competition from other marques such as Honda and Mazda and exacerbated by the absence of new models. The stronger USD and negative operating leverage resulted in pretax margins falling to 11.6% during the quarter from 15.3% in 1Q14. UMWOG’s revenue and pretax profit fell 4.6% and 50.5% QoQ respectively from lower charter and utilisation rates, as well as NAGA-7 costs after the termination of itscontract with Frontier Oil. Heavy equipment sales were higher than expected, which management attributed to pre-GST purchases and supplies to the jade mining industry in Myanmar. The “Others” division continued to bleed, as it booked a MYR49.5m net loss in 1Q15.
• Forecasts and risks. We slash our 2015-2017 estimates by 14.5%-21.1%. Headwinds at the automotive and oil & gas divisions maycontinue to persist, while equipment sales are likely to have peaked. The main risks are unfavourable exchange rates, weaker consumer sentiment and lower oil prices.
• Unjustifiable valuations. UMW trades at a forward P/E of 16x – well in excess of its historical average P/E of 12x that we are unable to justify given the lack of earnings growth. Assuming a payout ratio of 60%, the stock offers an unattractive yield of 3.3%. We cut our SOP-derived TP to MYR8.65 (see Figure 5) from MYR9.70, and reiterate our SELL call.