UMW Holdings - Toyota sales target raised, recent profit-taking provides attractive entry point BUY

- We re-affirm our BUY call on UMW and maintain our fair value of RM11.00/share. Our SOP derived valuation still pegs UMW autos at 14x FY12F earnings, at par to mid-cycle PE to reflect expectations of a multi-year record breaking earnings streak and 21% 3-year earnings CAGR up till FY14F.

- Our chat with management yesterday indicates that UMW’s sales target for Toyota has been revised up by 3% to 96K units from 93K units previously. The target is now closer to our projection of 96,695 units. Management however,indicated that this is a conservative forecast and we see room for upside. 1H12 Toyota sales of 51,567 already account for 54% of the revised target. 

- A key volume driver in 2H12 is the new, CKD Camry, which has generated over 3000 bookings i.e. double its sales target of 1,500/month in just a month of launch. At this rate, the Camry will account for 15% of Toyota’s monthly sales, making it the 3rd largest volume driver after the Vios and Hilux. More importantly, the sales target of 1,500  is 3.5x higher than Jan-May 2012 Camry sales of an average  420 units/month. Profit margins may surprise on the upside given RM20-25K duty savings derived from localisation. 

- We acknowledge competition from Euro marques, but VW’s CKD Passat launched early this year has not seemed  to impact Camry sales, underpinned by the abovementioned strong bookings. A comprehensive sales and after sales network, good second hand values and strong brand visibility cannot be built overnight, despite “extended warranties” offered by Euro marques. Underpinning our view, Toyota’s market share increased to 18% in June (from 12% in  Jan 2012) despite a more competitive environment.

- We maintain our FY12F net profit of RM888mil (+52% YoY). UMW’s share price has corrected by a sharp 5% in the past one week. At FY12F PE of 12.5x, UMW is now looking very attractive (11% discount) relative 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. 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 it arise.

- Furthermore, the group is at the cusp of oil & gas division recovery, building up momentum on rig acquisitions  and potential marginal field contract wins. Additionally, UMW provides cheap access as an O&G asset owner & operator – as a 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 off the economic crisis in 2009.   

Source: AmeSecurities