umw 2q10 - reiterate hold

8/9/2019 UMW 2Q10 - Reiterate Hold

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All required disclosures and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission. Copyright 2010 The McGraw-Hill Companies, Inc. Page 1 of 4

UMW HoldingsRecommendation: HOLD

Stock Code:4588 Bloomberg:UMWH MK Price:MYR6.43 12-Month Target Price:MYR7.00 Date:August 23, 2010

Pric e (MYR)

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

Pr ice 30 Day Moving Aver age

Board: Main

Sector: Consumer Products

GICS: Consumer Discretionary/Auto Parts & EquipmentMarket Value - Total: MYR7,197.2 mln

Summary: UMW Holdings (UMW) assembles anddistributes Toyota vehicles in Malaysia and owns a 38%stake in Perodua. It is also a distributor of heavy equipment.It also has businesses in steel pipe manufacturing,exploration, fabrication and oilfield services. The stock is acomponent of the FBM KLCI and FBM EMAS.

Analyst: Alexander Chia, ACA

Vol ('000)

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2,000

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6,000

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Aug 07 Oc t 07 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Dec 08 Feb 09 Apr 09 Jun 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10 Aug 10

Vol ume

Results Review & Earnings Outlook UMW's 2Q10 results were significantly ahead of our forecasts as well

as consensus estimates. Net profit of MYR211.7 mln (+166.5% YoYand +59.3% QoQ) took earnings for 1H10 to MYR344.6 mln (+136.9%YoY).

While group revenue for 1H10 of MYR6.32 bln was slightly ahead ofexpectations, reaching 52.3% of our previous 2010 estimate, UMWachieved significantly stronger margins, attributable mainly tofavorable forex movements and an improved product mix. Operatingmargin for 1H10 reached 10.7% compared to 7.0% in 2009 and our8.6% 2010 estimate.

UMW recorded improved profitability across the automotive,equipment and manufacturing & engineering divisions. But the oil &gas business continued to record a pretax loss due to the slowrecovery of the industry and delay in finalizing the contractual termsfor the NAGA-2 rig. Toyota vehicle registrations rose 18.1% YoY in1H10 to 43,502 units, lifting automotive revenue by 32.5% YoY. Theequipment and manufacturing & engineering divisions achieved YoYrevenue growth of 29.9% and 36.8% respectively. 2Q10 associatecontributions were 60.9% higher QoQ, helped by stronger Peroduasales and reduced associate losses from WSP Holdings. A single tierinterim DPS of 10 sen (2009: 6 sen) was declared.

We lift our 2010 and 2011 profit estimates by 21.4% and 21.0%respectively after factoring in higher profit margins. The oil & gasdivision is expected to improve in 2H10, with the NAGA-2 rig beingcommissioned in Se tember.

Recommendation & Investment Risks We reiterate our Hold call but lift our 12-month target price to MYR7.00

(from MYR6.50), following our raised earnings estimates.

Our target price is derived using a sum-of-parts approach, ascribingPER multiples of 10.5x, 10.0x and 8.5x (from 11x, 13x and 8.5x) to2011 (unchanged) auto, oil & gas and other businesses, respectively,and also includes the valuation surplus for 1,394 acres of industrialland in Serendah. The target PER ascribed to its oil & gas earnings isbenchmarked to its peers in the upstream oil & gas sector. Our targetprice includes the estimated 2010 net DPS.

We retain our Hold recommendation despite the sharp revision inearnings. While the outlook for UMWs various businesses remainssolid, helped by improved consumer discretionary spending patternsand the ongoing economic recovery, 2010 and 2011 PER valuations of11.0x and 9.8x are close to adequately reflecting its prospects, in ouropinion. The oil & gas business is expected to turn around in 2H10.While the NAGA-2 rig was recently leased out on a long-term contract,UMW has yet to announce a lease for the NAGA-3 rig due for deliveryby end-2010.

Risks to our recommendation and target price include an unexpectedweakening in consumer discretionary spending. A sustained reversal ofthe MYR against the JPY and USD would also raise import costs andweaken margins.

Key Stock Statistics

FY Dec. 2009 2010EReported EPS (sen) 33.6 58.2

PER (x) 19.1 11.0Dividend/Share (sen) 20.0 29.1

NTA/Share (MYR) 3.15 3.44Book Value/Share (MYR) 3.37 3.66

No. of Outstanding Shares (mln)52-week Share Price Range (MYR)Major Shareholders:

Skim Amanah Saham Bumiputera

Employees Provident Fund BoardPermodalan Nasional Bhd

*Stock deemed Shariah compliant by the Securities Commission.

15.012.7

1,119.35.96 - 6.55

%

40.4

Per Share DataFY Dec. 2007 2008 2009 2010EBook Value (MYR) 2.89 3.23 3.37 3.66

Cash Flow (sen) 62.3 72.6 53.4 78.1Reported Earnings (sen) 44.6 52.3 33.6 58.2

Dividend (sen) 30.0 37.0 20.0 29.1Payout Ratio (%) 50.6 57.6 60.5 50.0PER (x) 14.4 12.3 19.1 11.0

P/Cash Flow (x) 10.3 8.9 12.0 8.2P/Book Value (x) 2.2 2.0 1.9 1.8Dividend Yield (%) 4.7 5.8 3.1 4.5

ROE (%) 16.5 17.1 10.2 16.6Net Gearing (%) 0.0 0.0 11.6 0.0


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All required disclosures and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission. Copyright 2010 The McGraw-Hill Companies, Inc. Page 2 of 4

UMW HoldingsRecommendation: HOLD

Stock Code:4588 Bloomberg:UMWH MK Price:MYR6.43 12-Month Target Price:MYR7.00 Date:August 23, 2010

FY Dec. / MYR mln 2Q10 2Q09 % Change

Reported Revenue 3,282.1 2,581.1 27.2Reported Operating Profit 397.5 181.5 >100Depreciation & Amortization NA NA NANet Interest Income / (Expense) -4.3 -8.6 -49.9Reported Pre-tax Profit 442.3 185.5 >100Reported Net Profit 211.7 79.4 >100Reported Operating Margin (%) 12.1 7.0 -Reported Pre-tax Margin (%) 13.5 7.2 -

Reported Net Margin (%) 6.5 3.1 -Source: Company data

Quarterly Performance

Profit & LossFY Dec. / MYR mln 2008 2009 2010E 2011EReported Revenue 12,769.6 10,698.0 12,795.1 13,885.2

Reported Operating Profit 1,073.7 751.4 1,281.3 1,442.7Depreciation & Amortization -216.0 -214.0 -216.1 -217.9

Net Interest Income / (Expense) 3.2 -5.2 -12.4 4.3Reported Pre-tax Profit 1,276.7 834.6 1,437.2 1,630.3Effective Tax Rate (%) 25.1 23.7 24.0 24.0Reported Net Profit 565.8 371.1 651.7 737.0Reported Operating Margin (%) 8.4 7.0 10.0 10.4

Reported Pre-tax Margin (%) 10.0 7.8 11.2 11.7Reported Net Margin (%) 4.4 3.5 5.1 5.3

Source: Company data, S&P Equity Research


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Required Disclosures

Redistribution or reproduction is prohibited without written permission. Copyright 2010 The McGraw-Hill Companies, Inc. Page 3 of 4

Standard & Poors Equity Research ServicesStandard & Poors Equity Research Services U.S. includes Standard & PoorsInvestment Advisory Services LLC; Standard & Poors Equity Research ServicesEurope includes Standard & Poors LLC- London; Standard & Poors Equity

Research Services Asia includes Standard & Poors LLCs offices in Hong Kongand Singapore, Standard & Poors Malaysia Sdn Bhd, and Standard & PoorsInformation Services (Australia) Pty Ltd.

Glossary

Strong Buy: Total return is expected to outperform the total return of the KLCI orKL Emas Index respectively, by a wide margin over the coming 12 months, withshares rising in price on an absolute basis.Buy: Total return is expected to outperform the total return of the KLCI or KL EmasIndex respectively, over the coming 12 months, with shares rising in price on anabsolute basis.Hold: Total return is expected to closely approximate the total return of the KLCI orKL Emas Index respectively, over the coming 12 months with shares generallyrising in price on an absolute basis.Sell: Total return is expected to underperform the total return of the KLCI or KLEmas Index respectively, over the coming 12 months and share price is notanticipated to show a gain.Strong Sell: Total return is expected to underperform the total return of the KLCI orKL Emas Index respectively, over the coming 12 months by a wide margin, withshares falling in price on an absolute basis.

S&P 12 Month Target Price The S&P equity analysts projection of the marketprice a given security will command 12 months hence, based on a combination ofintrinsic, relative, and private market valuation metrics.

Shariah-compliant stock - As defined by the Shariah Advisory Council ofMalaysias Securities Commission


All of the views expressed in this research report accurately reflect theresearch analyst's personal views regarding any and all of the subjectsecurities or issuers. No part of analyst compensation was, is, or will be,directly or indirectly, related to the specific recommendations or viewsexpressed in this research report.

Additional information is available upon request.

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This material is not intended as an offer or solicitation for the purchase or sale ofany security or other financial instrument. Securities, financial instruments orstrategies mentioned herein may not be suitable for all investors. Any opinionsexpressed herein are given in good faith, are subject to change without notice, andare only correct as of the stated date of their issue. Prices, values, or income fromany securities or investments mentioned in this report may fall against the interestsof the investor and the investor may get back less than the amount invested. Wherean investment is described as being likely to yield income, please note that theamount of income that the investor will receive from such an investment mayfluctuate. Where an investment or security is denominated in a different currency tothe investors currency of reference, changes in rates of exchange may have anadverse effect on the value, price or income of or from that investment to theinvestor. The information contained in this report does not constitute advice on thetax consequences of making any particular investment decision. This material is notintended for any specific investor and does not take into account your particularinvestment objectives, financial situations or needs and is not intended as arecommendation of particular securities, financial instruments or strategies to you.Before acting on any recommendation in this material, you should consider whetherit is suitable for your particular circumstances and, if necessary, seek professionaladvice.

For residents of the U.K. This report is only directed at and should only be relied onby persons outside of the United Kingdom or persons who are inside the UnitedKingdom and who have professional experience in matters relating to investments

or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to(d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order2005, respectively.

For residents of Singapore - Anything herein that may be construed as arecommendation is intended for general circulation and does not take into accountthe specific investment objectives, financial situation or particular needs of anyparticular person. Advice should be sought from a financial adviser regarding thesuitability of an investment, taking into account the specific investment objectives,financial situation or particular needs of any person in receipt of therecommendation, before the person makes a commitment to purchase theinvestment product.

For residents of Malaysia. All queries in relation to this report should be referred toAlexander Chia, Desmond Chng or Ching Wah Tam.


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Redistribution or reproduction is prohibited without written permission. Copyright 2010 The McGraw-Hill Companies, Inc. Page 4 of 4

Recommendation and Target Price HistoryDate Recommendation Target PriceNew Hold 7.00

24-May-10 Hold 6.5023-Nov-09 Sell 6.0021-May-09 Sell 5.5027- e -09 trong e 3.5025-Nov-08 Strong Sell 4.0021- ug-08 e 5.6027-May-08 Sell 6.3030-Apr-08 Sell 6.00

Price (MYR)

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Aug 07 Nov 07 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10

umw 2q10 - reiterate hold

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