UMW Holdings Bhd
(May 27, RM10.56)
Maintain hold with a lower fair value of RM10.70 from RM11.40 previously: UMW reported core net profit of RM182 million for its first quarter ended March (1QFY15) which was within our, expectations but below consensus’, accounting for 22% of our and 20% of consensus’ estimates.
Group earnings were down 23% year-on-year (y-o-y), dragged down mainly by the automotive and oil and gas (O&G) divisions.
For the automotive division, Toyota’s total industry volume (TIV) declined 33% y-o-y and 41% quarter-on-quarter (q-o-q). Pre-tax earnings were down 43% y-o-y as margins were impacted by the stronger US dollar and diseconomies of scale given lower manufacturing volumes.
Toyota TIV was impacted by stiff competition and new launches from Honda, Mazda and Nissan as well as the lack of volume model launches from Toyota this year.
New launches in FY15 are focused on mid- to higher-priced models such as the new Camry or Hybrid and the new Hilux.
We think the Camry could drive improvements in underlying margins, but 2Q will also reflect a further climb in greenback to the RM3.50 to RM3.70 levels, which will likely offset the positive impact.
Its O&G division’s 1Q earnings and margins were impacted by discounts on charter rates given to existing clients given the drop in oil prices and additional operating expenditure for Naga 7 which saw its contract with Frontier Oil terminated.
This is despite higher revenue driven by full-quarter contribution of Naga 5 and 6, improved operating efficiency for Naga 2 and 3, and translation gains from the stronger US dollar.
Though UMW’s results were broadly in line, we trim our FY15, FY16 and FY17 earnings by 8%, 7% and 3% as year-to-date US dollar to ringgit levels are still elevated at 3.62 relative to our FY15 assumption of 3.40 previously.
Additionally, we trim our rate assumptions for selective jack-up rig contracts that are nearing expiry given a depressed outlook in the near term, in addition to higher cost for Naga 7 which saw its contract with Frontier Oil terminated.
This results in a 6% and 3% reduction in the O&G division’s FY15 and FY16 earnings.
At 18% net gearing, the balance sheet is pretty underutilised and proceeds from the listing of UMW Oil & Gas Bhd in FY13 remain a wildcard for acquisitive growth.
Immediate-term fundamentals however, remain lacklustre and will drag on the share price performance. — AmResearch, May 27
UMW (4588) - UMW in a weak start to a very tough year
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