UMW Holddings - Earnings inflexion point underpinned in 1Q12 BUY

- We re-affirm our BUY call on UMW at unchanged fair value of RM8.90/share. UMW 1Q12 results re-affirms one of the key basis of our upgrade (see report dated 19^th  April 2012) – FY12F earnings is on track to hit record high driven by recovery at UMW Toyota, group O&G division and group equipment division. 

- The group reported net profit of RM220mil for its 1Q12 (+ 45% YoY). The results included reversal of impairment on losses on investments of RM19mil and a reversal of impairment losses on receivables of RM9mil. Normalised net profit registered at RM192mil (+27% YoY) accounting for 23% of our and 24% of consensus FY12 forecast. 

- Auto, O&G and equipment divisions were key growth drivers in 1Q12. Auto division saw pretax earnings rise 12% YoY, equipment rose 59% YoY and the O&G division saw massive improvement in earnings to RM30mil from <RM1mil in 1Q11 – Naga 3 (jack-up rig) and HAKURYU 5 (semi-sub) was still idle in 1Q11 vs. full operational earnings in 1Q12. 

- As expected, auto margins expanded slightly YoY on improved capacity utilisation, while auto revenue was up by 3% YoY on the back of a 7% YoY rise in Toyota TIV. Despite Perodua’s TIV falling 2% YoY, revenue is up 2.5% while earnings is up 5% YoY given better sales mix i.e. more MyVi sales (full model change launched in 2H11) which command better margins. 

- Depending on the strength of overall auto sales in 2Q12, we see room for earnings upside in the near-term. 2Q12 should see oil & gas earnings gain further traction reflecting Naga 3’s higher day rates – 15% higher day rates (rate revision secured in 2Q12). UMW Toyota should see further improvement as supply normalise post March 2012, while huge order backlog of 4-6 months waiting list underpins sales growth. 

- Dividend yields remain attractive (4.6% gross yield) with room for upside as capex will fall this year onwards. UMW spent ~RM600mil as capex in FY10-11. FY12F capex will fall 20%-40% to RM400mil-500mil – generating cash savings of 9-17sen/share. A potential wildcard is M&A, particularly in the auto sector.  

- UMW remains a key blue chip laggard in the market. Despite strong earnings recovery on track to hit a record high, UMW is trading at below historical average valuation of 12x PE.  Key catalysts: (1) Earnings revisions – our forecast is 6% higher than street estimates; (2) Launch of new Camry in June; (2) Continued TIV outperformance vs. industry; (3) Potential M&As in the auto sector in particular; (4) O&G asset rationalisation.  

Source: AmeSecurities