UMW Holdings: Upgrade to Buy - Set To Accelerate

By Am Research
23 Apr 2012

Upgrade to Buy with a higher TP of MYR8.35, ahead of recoveries at
the automotive and O&G sectors, and on the back of a 10-11% rise in
2012-13 net profit forecasts. The disruption to the regional auto supply
chain has abated while its O&G segment is at the cusp of a revival.
With market already absorbing the anticipated weak 1Q12 earnings
and its 2011 kitchen-sinking exercise, UMW now offers a recovery play
angle with modest growth (3-year EPS CAGR of 20%) and
undemanding valuations, supported by a decent dividend yield (6%).

Auto to surge ahead. We have raised our forecasts for Toyota vehicle
sales by 2-9% in 2012-13 to reflect an improved sales order outlook,
fuelled by its interesting launches ahead. Judging from its 1Q12 vehicle
sales, Toyota was less affected by the supply chain disruption owing to
its enhanced parts network. It is also more immune to the tightening of
HP lending criteria due to the generally stronger purchaser credit
profile. With minimal price discounting, UMW should be able to sustain
its 16% pretax margin. Earnings from 38%-owned Perodua are also set
to improve, largely on higher vehicle sales (+2-5% YoY) in 2012-13.

Expect a  rejuvenated  O&G. This is in lieu of the: (i) absence of
impairment or write-offs, which severely afflicted its 2011 performance,
(ii) reduced losses from 23%-owned WSP on improved ASP, unit sales
and margins, and (iii) stronger contributions from its drilling rigs
operations following a higher charter contract rate (+27%) secured for
its Naga 3 rig recently. Meanwhile, UMW will make an announcement
by end-April on the WSP privatisation offer by HDS Investment.

Net earnings  lifted  by 10-11% in 2012-13, incorporating  the higher
profits from auto (+5-11%) and O&G (loss in 2011) divisions. We now
expect UMW to register a higher net profit of MYR723m in 2012 and
MYR812m in 2013. Consequently, we also raise our DPS forecasts to
41sen in 2012 and 46sen in 2013, on a 50% payout assumption. This
translates into a decent yield of >6%, which would provide support to
UMW’s share price. Our new target price is based on a higher 12x PER
for 2013 (11x previously), to reflect UMW’s historical mean PER. Based
on the last closing price, this offers a decent 11% upside to our TP.


Share price: MYR7.51
Target price: MYR8.35


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