UMW Holdings - Headed for ONE GREAT YEAR!

-  We re-affirm our high conviction BUY on UMW, following the release of strong 2Q12 results. Our SOP-derived fair value of RM11.00/share is maintained at this juncture, with an upward bias. The group reported 2Q12 net profit of RM224mil, which brought 1H12 earnings to RM444mil. The results were within expectations, accounting for exactly 50% of our FY12F earnings of RM888mil and 54% of consensus estimates. 

-  Group earnings improved 17% QoQ driven mainly by UMW autos – underpinning our expectation of a multi-year record earnings streak driven by a strong cyclical upward trend, at UMW Toyota in particular. UMW autos saw a 32% QoQ earnings growth driven by:- (1) Strong Toyota sales growth (+29% QoQ), (2) Supply chain recovery towards April; (3) 1ppt QoQ margin improvement given better economies of scale and an improved competitive environment.

-  Its oil & gas division registered a significant profit contraction, given the dry-docking of Naga 1, which will be back in operations by 4Q12. This came despite Naga 3’s higher day rates (+15%) following a contract renewal at end-March. Nonetheless, our FY12F O&G net profit of RM57mil looks achievable vs. 1H12 earnings of RM23mil. Additionally, USTPL (Indian pipe-making plant) suffered significant exchange losses given the depreciation of INR against USD.

-  Contribution from the new CKD Camry should start to be reflected in group results from 3Q12. While we would not expect outright volume increases given that the Vios is reaching end of life, margins will be driven higher by a much higher mix of higher margin Camry in Toyota’s TIV. A sales target of 9K for 2012 (6-months period) implies 1,500 unit sales/month, which will be the 3^rd  largest Toyota volume driver after Vios and Hilux.

-  We maintain our FY12F net profit of RM888mil (+52% YoY). FY12F PE of 13x, is at 11% discount to mid-cycle PE of 14x. UMW is on track to hit record earnings on strong auto recovery (off two natural disasters in 2011 and tighter banking policies since Jan 2012). We project auto earnings to grow 14% in FY12F. More importantly. a solid balance sheet (23% net gearing post-rig acquisition) positions the group well to capitalise on M&A opportunities in the auto sector, should any arise.

-  Furthermore, the group is at the cusp of recovery in the oil & gas division, building up momentum on rig acquisitions and potential marginal field contract wins. Additionally, UMW provides a cheap access as an O&G asset owner & operator –for comparison, Bumi Armada is trading at 24x CY12F earnings. Our O&G projections are still very conservative at RM50mil net profit vs. 1Q12 O&G earnings of RM20mil (annualised: RM80mil). As a valuation yardstick, UMW traded up to a high of 17x in 2010 when earnings recovered from the economic crisis in 2009.   

Source: AmeSecurities