Stock Name: UMWCompany Name: UMW HOLDINGS BHDResearch House: BIMB
UMW Holdings Bhd
(Jan 13, RM7.72)
Maintain 'buy' with target price of RM8.11: UMW recorded an above-expectation strong 82% year-on-year (y-o-y) growth in net profit in 9MFY10, driven mainly by stronger sales of Toyota and Perodua cars, weaker US dollar (USD) against ringgit and stronger performance of equipment division. A total of 212,700 units of Toyota and Perodua vehicles were sold in 9MFY10, accounting for 47% of total industry volume (TIV) of 453,000 units.
Meanwhile, USD weakened by almost 10% against the ringgit during the same period, largely driving the improvement in earnings before interest and tax (Ebit) and net profit margins by 4% and two percentage points respectively.
Meanwhile, on year-to-date (YTD) basis, the sales of Perodua and Toyota vehicles grew by 11.7% and 11% y-o-y respectively to 169,200 and 82,300 units, driven by the overall improvement in domestic vehicle sales on the back of improving economic condition, coupled with the introduction of Alza and other facelift variants.
The oil and gas (O&G) division was in the red for three consecutive quarters mainly due to protracted losses suffered by WSP Holdings as exports of O&G pipes especially to North America (particularly in the US) were hampered by anti-dumping ruling introduced since 2009, coupled with the delay in the commissioning of Naga 2 and Naga 3 oil rigs.
Although the overall performance of the group would still be largely driven by the expected steadier performance by the automotive division, the management expects its O&G division to turn around in 2011. While the vehicle sales of UMW Toyota are expected to come in around this year's level (2010F: 90,000; 2011F: 92,000), Perodua's management expects its vehicle sales to reach 190,000 units, to be underpinned by the still resilient sales of Viva, Alza and the introduction of Myvi replacement model. We expect domestic TIV to grow by a modest 3.1% next year, to be underpinned by the steady economic growth, new model launches (facelift included) and the still favourable financing environment.
Meanwhile, O&G division is expected to recover to be driven especially by UMW's various greenfield investments and new contributions from the Naga 2 and Naga 3 oil rigs. Earnings of key O&G associates especially the ones producing O&G pipes like the 40%-owned Shanghai Tube Cote, 25%-owned Shanghai BSW Petropipe, 29.4%-owned Zhongyou and NYSE-listed 22.3%-owned WSP Holdings should experience recovery in 2011 and organic improvement going forward, in tandem with the expected recovery in the O&G pipe segment. Note that WSP has been actively looking and successfully securing new customers in the international markets to absorb the impact of anti-dumping ruling in the US which appeared to have been the major factor for its lacklustre performance.
Additionally, UMW's continuous M&A activities and potential JV agreements especially in key emerging markets like India and China are expected to boost the O&G earnings contributions exponentially going forward. Besides that, more excitement could be expected in 2011, on the back of stronger contributions from its (1) 32.5%-associate, United Seamless Tubular in India, which has already commenced its commercial production and shipment of seamless tubular green pipes; and (2) PT TPCO Pan Asia, a new plant in Batam, Indonesia, which began processing and threading of OCTG pipes in 2H10.
The USD has weakened by almost 10% YTD, and note that, our sensitivity analysis shows that UMW's Ebit would be enhanced/squeezed by circa 4% for every 1% decrease/increase in USD against the ringgit as UMW Toyota is now purchasing its completely built up and completely knocked down packs from Toyota Motor Corp more in the greenback (against in yen previously). Therefore, in line with our house view of expecting the USD to weaken to around RM3 per USD in 2011, the margins enhancement trend is expected to sustain at least into 1H11, ceteris-paribus.
We continue to like UMW for its (1) commanding presence in the domestic automotive industry through Perodua and Toyota's dominance in the national and non-national segment respectively; (2) market leadership in certain segments in equipment and manufacturing businesses; (3) O&G division's turnaround prospects in 2011 and its long-term growth potentials; and (4) good dividend play with payout commitment of at least 50% of net profit.
Moreover, UMW's healthy potential dividend yields of 4.4% and 4.5% (conservatively based on 50% dividend payout target) in FY11 and FY12 offer a good defensive play.
Key re-rating catalysts include (1) improvement in O&G earnings; (2) higher-than-expected Toyota and Perodua vehicle sales; (3) higher-than-targeted dividend payout (as evident historically); and (4) material announcement on the proposed O&G listing. Additionally, material announcement on its O&G division's listing may also provide short-term excitement in the share price. ' BIMB Securities Research, Jan 13
This article appeared in The Edge Financial Daily, January 14, 2011.
