UMW Holdings - Return of a strong replacement cycle

-  We re-affirm our BUY call on UMW, with a higher fair value of RM12.70/share (vs. RM11.00/share previously) as we roll over valuations to FY13F. Our SOP-derived valuation continues to peg UMW autos at 14x and O&G division at 16x PE. 

-  UMW’s strong 2Q12 results recently underpin our bullish expectations on UMW autos. While strong earnings in 1H12 was driven largely by a recovery off a supply chain crisis in 2011 and the introduction of several new models in early 2012, the sales momentum is likely to strengthen further out.

-  First, the new Camry (launched in June 2012) will drive margin improvements in 2H12. Margins derived from a typical D-segment model can be 10ppts-15ppts higher than that of a B-segment model (which is typically the volume driver for any marque). We expect the higher margin Camry to account for up to 15% of Toyota monthly sales in 2H12 from just around 5% in 1H12.

-  Second, Toyota should see a strong replacement cycle in 2013 coming off a record base of 101,629 unit sales in 2008 (assuming a typical 5-year replacement cycle) (See Chart 1). This strong replacement cycle will be underpinned by the launch of the new Vios, expected in early 2013 (production line setup takes only circa 3 months). Our projections currently model in 96,695 unit sales for 2012 and a conservative 6% growth in FY13F. As a yardstick, Toyota sales increased 23% YoY back in 2008 when the current generation Vios was launched. 

-  Meanwhile, UMW oil & gas should see earnings more than double to RM118mil next year, driven largely by full-year contributions of Naga 3’s new day rates, absence of Naga 1 dry docking and potential contributions from a new jack-up rig due to be delivered in Feb 2013.

-  We maintain our projections at this juncture, forecasting a 52% earnings growth in FY12F net profit to RM888mil, followed by another 14% growth in FY13F. UMW’s multi-year record earnings streak should underpin a 21% 3-year earnings CAGR up to FY14F. Our projections have yet to model in a significant jump in volumes from the new Vios in 2013.

-  Valuation at 12x FY13F earnings is at 15% discount to midcycle PE of 14x despite strong auto replacement cycle moving into FY13 and expectations of record earnings in the next 3 years. UMW is also a cheap proxy to local marginal field development as well as provides cheap access into local O&G asset operators, trading at a 40% discount to the likes of Bumi Armada (20x CY13F PE). Key catalysts: (1) Launch of the new Vios; (2) Potential M&As in the auto sector; (3) Potential contracts in O&G sector; (4) Stronger- than-expected TIV and margins.

Source: AmeSecurities