UMW is our top auto pick in the auto sector. The group’s prospects promise to be exciting as it emphasises on cost cuts while pouring in capex to boost the localization rate at its auto unit. The turnaround and potential listing of its O&G business could perk up its valuation and pave the way for a rerating at a higher PE multiple of 14x, just like the heydays of FY06 when this division’s profits accounted for 20%-30% of UMW’s total earnings. We maintain our BUY call, with a higher FV of RM13.36, as we peg higher PE multiples to its O&G and heavy equipment divisions, which are expected to be next year’s earnings drivers.
Autos to see moderate growth, while others soar. We foresee UMW’s earnings being driven by strong growth across all its divisions, notably oil and gas (O&G) and heavy engineering. Growth in its O&G unit will be boosted by a full-year contribution from Naga 1 and new charters for the Naga 3 rig, while the heavy engineering unit will see higher equipment orders, buoyed by heightening construction activities. Autos, however, are expected to see moderate earnings growth next year following the hot pace in 2012. We see this unit’s growth being driven by a combination of improving vehicle sales coupled with higher content localization to trim costs.
Potential listing of O&G biz. Media reports said UMW could potentially list its O&G division sometime next year to raise USD500m (RM1.5bn) in proceeds following several divestments of its non-core O&G businesses. We see this as a possibility sometime in 3Q or 4Q 2013 at the earliest, given that the O&G business is still undergoing a revamp. While the details on the IPO are still unclear, we estimate that UMW’s O&G business, which is more focused on upstream drilling activities, could potentially fetch a PE multiple of at least 16x on FY13 earnings, representing a steep discount to SapuraKencana’s 21x.
Upgrade earnings and PE multiples. BUY. We maintain our BUY call, with a higher FV of RM13.36, as we peg higher PE multiples to UMW’s O&G and heavy equipment divisions, both of which are expected to be next year’s earnings drivers. The potential listing of its O&G unit and the bigger earnings contribution from its heavy equipment business warrants higher PE multiple of 16x and 10x on FY13 earnings respectively, versus 14x and 9x earlier. We are also factoring in the higher charter rates for the Naga 3, as guided by management, as well as improving utilization of its pipe manufacturing plants in India and China. These will ultimately raise our earnings forecasts for FY13 and FY14 by 3%.
Autos to see moderate growth, while others soar. We foresee UMW’s earnings being driven by strong growth across all its divisions, notably oil and gas (O&G) and heavy engineering. Growth in its O&G unit will be boosted by a full-year contribution from Naga 1 and new charters for the Naga 3 rig, while the heavy engineering unit will see higher equipment orders, buoyed by heightening construction activities. Autos, however, are expected to see moderate earnings growth next year following the hot pace in 2012. We see this unit’s growth being driven by a combination of improving vehicle sales coupled with higher content localization to trim costs.
Potential listing of O&G biz. Media reports said UMW could potentially list its O&G division sometime next year to raise USD500m (RM1.5bn) in proceeds following several divestments of its non-core O&G businesses. We see this as a possibility sometime in 3Q or 4Q 2013 at the earliest, given that the O&G business is still undergoing a revamp. While the details on the IPO are still unclear, we estimate that UMW’s O&G business, which is more focused on upstream drilling activities, could potentially fetch a PE multiple of at least 16x on FY13 earnings, representing a steep discount to SapuraKencana’s 21x.
Upgrade earnings and PE multiples. BUY. We maintain our BUY call, with a higher FV of RM13.36, as we peg higher PE multiples to UMW’s O&G and heavy equipment divisions, both of which are expected to be next year’s earnings drivers. The potential listing of its O&G unit and the bigger earnings contribution from its heavy equipment business warrants higher PE multiple of 16x and 10x on FY13 earnings respectively, versus 14x and 9x earlier. We are also factoring in the higher charter rates for the Naga 3, as guided by management, as well as improving utilization of its pipe manufacturing plants in India and China. These will ultimately raise our earnings forecasts for FY13 and FY14 by 3%.
Source: OSK
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