UMW Holdings - Increased optimism on autos, rigging up O&G Buy

- We re-affirm our high conviction BUY on UMW (one of our top 2 sector picks) with a higher fair value of RM11/share (from RM10/share previously) following a recent meeting with management. Our SOP-derived valuation now pegs UMW autos at 14x FY12F earnings (13x previously) which is now at par to mid-cycle valuation. Valuations are due for a significant re-rating underpinned by strong auto recovery and the emergence of its O&G division as a key player in the sector.

- We raise our projections by 1-2% over FY12-14F to reflect higher projections for UMW Toyota, in particular. We sense increasing optimism about UMW’s auto business – driven by strong underlying demand and new launches. Our forecast now models in 96,695 unit Toyota sales (FY12F), which is currently higher than management’s target of 93K. 

- Underpinning our bullish view, however, management  is guiding for an upward revision to its sales target for Toyota, which should in turn catalyse a full-blown consensus rerating. Our projections are now 7%-8% above consensus over FY12-14F. A consensus upward revision looks imminent in the near-term. 

- Camry bookings have ballooned to over 3,000 units from circa 2,000 units in mid June vs. target monthly sales of 1,500/month. More importantly, June TIV due to be announced next week should further underpin the upward trend  in underlying Toyota sales – notwithstanding maiden deliveries of the new Camry which we expect to be insignificant in its first month of launch. 

- 2Q12 earnings are expected to strengthen further reflecting:- (1) Auto supply recovery, which should see plant utilisation improve translating in improved margins; (2) Improving Toyota sales; (3) Strong rebound of Perodua sales in May – coupled with margin improvement given higher mix of MyVi; (4) Higher rates for jack-up rig Naga 3 (+15%) in the O&G segment. 

- In the O&G sector, UMW is fast emerging as a dominant player – re-affirmed by the expansion of its rig fleet. Recent acquisition of a rig, kick-starts what we think, could be a slew of asset acquisitions, coming off contract awards expected in 2H12. An under-utilised balance sheet (5% net gearing) underpins UMW’s acquisitive growth potential. Our target PE for UMW O&G is raised to 16x (at par to sector PE vs. 12x previously) to reflect increasing newsflows on this front.

- More importantly, UMW O&G is deeply undervalued. At current market cap of RM11bil, investors are essentially getting UMW O&G for free (see Table 4). The local O&G sector in comparison is trading at 16x CY12F earnings. UMW is positioned as one of the cheapest plays into the marginal field development theme. 

Source: AmeSecurities