UMW Holdings - Dividends raised, earnings in-line BUY

- We maintain our BUY call on UMW with an unchanged fair value of RM13.20/share following the release of its 4Q12 results last night.

- UMW group’s FY12 earnings came in within expectations. The group reported a net profit of RM208mil for 4Q12, which brought FY12 core earnings to RM951mil. This accounted for 100% of our estimate and 95% of consensus.

- Earnings declined 23% QoQ on the back of the auto segment’s promotion-driven volume growth in 4Q12 (Toyota TIV: +16% QoQ); auto division earnings were down 17% QoQ. However, the margin contraction is temporary as this coincided specifically with UMW Toyota’s anniversary promotions in 4Q12.

- Additionally, 4Q12 auto earnings were negatively impacted by stronger USD trends. This trend has reversed to a certain extent and should be reflected from 1Q13. Auto players stock-up up to 3 months’ physical kit inventory, hence the lag on financial impact from FX changes vs. actual spot trends.

- Perodua (a 38% associate accounting for 17% of bottom line) is a beneficiary of the weaker JPY. Every 1% change in JPY impacts Perodua’s bottom line by 1%-2%. Meanwhile, UMW Toyota should benefit from a weaker USD, which has depreciated 4%-5% off peak levels in mid-2012. Every 1% change in USD and JPY (via Perodua) collectively impacts group bottom line by 3%.

- The launch of the new generation Vios in 2H13 should provide a fresh demand boost for Toyota. The group is currently reconfiguring the production set-up at its Shah Alam plant to enhance capacity via increased automation (targeted to increase capacity to 90K/annum from 70K/annum (on 1.5 shift) currently.

- An under-leveraged balance sheet suggests further acquisitive growth at UMW O&G, riding on the expiry of 8 jack-up rig contracts this year - UMW is the only local operator of jack-up rigs. We see a significant upside to our O&G projections should M&A-driven growth materialises. UMW recently set up an Islamic medium-term note facility of RM2bil, providing it a ready credit line to capitalise on M&A opportunities.

- Meanwhile, the scheduled listing of UMW O&G should crystallise the value of this unit – implied valuation of 11x at current market cap vs. sector average PE of 16x and O&G asset-owner-operator valuation of 19x-20x.

- The dividend payout for FY12 was raised to 50 sen/share (+61% vs. FY11’s 31 sen/share) translating into a dividend yield of 4%, which should provide share price support.

Source: AmeSecurities