UMW Holdings - 3Q12 outperformed, earnings trajectory underpinned BUY

- We re-affirm our BUY rating on UMW following the release of strong 3Q12 results. Our fair value of RM12.70/share is under review with an upward bias, pending an analyst briefing this morning. 

- UMW reported a net profit of RM299mil for 3Q12, bringing 9M12 earnings to RM743mil. This is ahead our expectations and consensus, accounting for 83% and 82% of FY estimates, respectively. Our projections are under review.

- Reasons for outperformance:- (1) Despite a 14% QoQ  TIV contraction, the auto division’s margins were stronger than expected, underpinned by a much higher mix of the new CKD Camry (launched in June 2012) – we estimate the Camry now accounts for 15% of Toyota TIV vs. 5% in 1H12; (2) Lower- thanexpected tax rate; (3) Recognition of positive FV movement in OCTL (a quoted foreign investment) and forex gain on strengthening of the Indian Rupee (estimated at RM20mil).

- Revenue contracted 4% QoQ on the back of a 14% Toyota TIV decline, but earnings grew 33% QoQ, driven by the auto (reflecting maiden quarter of contributions from the new Camry) and oil & gas divisions’ margin improvement (1ppt and 6ppt qoq). O&G margins in 2Q12 were negatively impacted by dry docking costs for Naga 1.

- Management guided that Toyota sales may exceed its earlier, revised target of 97K for 2012. Strong Toyota TIV in recently reported October industry sales numbers underpin this trajectory. Annualised YTD (October) Toyota sales stand at 101K vs. our forecast of 97K.  The launch of Nissan’s new Almera will dilute some market share for the Vios,  but the impact is already partly reflected in 3Q12 as sales of existing models usually slow down 3-4 months ahead of the entry of a new competing model. 

- Underpinning UMW auto’s earnings upward trend is the new Camry (full-year contribution in FY13F), which commands much higher margins (10-15ppts higher) than a typical Bsegment like the Vios. Additionally, an end-of-life model like the Vios commands good margins as the bulk of the value chain depreciation has been taken in the early years of the launch. More importantly, we expect the new generation Altis and Vios to be introduced in 2013, underpinning a strong (5-year) replacement cycle for Toyota, off a record sales base of 101,629 units in 2008. Our 2013 projection has yet to factor in the new Vios and Altis –103K (FY13F) unit sales vs. annualised YTD of 101K.

- Key catalysts: (1) Earnings revisions; (2) New model launches, i.e. Toyota Vios and Altis, Perodua Viva replacement; (3) 5-year replacement cycle, off 2008 record Toyota TIV base; (4) Potential acquisitions in the auto and O&G sectors (in its core oilfield services division) given a relatively under-leveraged balance sheet (FY12F: 23% post  new rig acquisition of RM683mil).  

Source: Kenanga