UMW Holdings (UMWH MK; BUY; TP: MYR13.82): Recovery in motion

UMW Holdings (UMWH MK; BUY; TP: MYR13.82): Recovery in motion

• What's New? We recently hosted UMWH on a 2-day Non-Deal Roadshow (NDR) in Hong Kong. The management team was represented by Dr Wafi Nazrin Abdul Hamid (Executive Director) and S Vikneshwaaran (Head of Investor & Media Relations).
• Key takeaways from NDR. Institutional funds were generally receptive towards UMWH’s  gradual recovery in its core operations (especially the Auto and Equipment divisions), business direction and inexpensive valuation (11x FY15 PER ex UMWOG) backed by 4% yield (based on 50% DPR).

There were queries on: (i) UMWH’s potential future investments since it has turned net-cash post the listing of UMWOG; and (ii) the possibility of higher dividends. Management is comfortable with their 3-year average DPR of 70% and is carefully considering potential earnings accretive investments which we believe would be complimentary to its existing operations. As at end-1Q14, UMWH sits on net cash of MYR423m or MYR0.36/UMWH share.

• What’s Our View? The auto division will continue to anchor UMWH’s earnings and with stronger-than-expected vehicles sales in 1H14, management has raised its 2014 internal vehicles sales target for Toyota and Lexus to 100k units (from 98.4k units previously). We see further upside to UMWH’s revised internal target given that 2H is seasonally stronger due to Hari Raya and year-end promotions

As for 38%-owned Perodua, despite reported 1H14 Perodua vehicle sales of 95k units (-2% YoY), which met 50% of our forecast for 2014, we see upside to our forecast given the imminent launch of the new A-segment EEV Perodua Axia in 3Q14 which is earlier than expected. Perodua has already started taking orders for the Axia since last week.

We also see upside potential to our conservative export volume assumptions of 10k/15k/25k units for 2014/15/ 16. With Perodua’s new state-of-the-art manufacturing plant entering full-scale production by end-2014, Perodua will be able to raise its production capacity to up to 400k units p.a. (from 200k units now).

We expect overall utilisation for Perodua’s two plants to pick up quickly due to: (i) strong demand for Daihatsu vehicles in Indonesia; and (ii) potential contract assembly works from Toyota Malaysia. Daihatsu’s biggest market in ASEAN is Indonesia where it commands 15% market share (186k units) of Indonesia’s TIV of 1.2m units in 2013.

• Foreign shareholding rebounded from a 2-year low. As at end-Jun 2014, UMWH’s foreign shareholding jumped to 17.7% from a two-year low of 16.0% at end-Mar 2014. Given limited downside and better outlook, we do not rule out further accumulation, with UMWH being viewed as a cheaper exposure to 55.2%-subsidiary UMW Oil & Gas (UMWOG MK; BUY; TP MYR5.15), which currently trades at a FY15 PER of 18x vs 13x for UMWH. UMWH’s foreign shareholding hit a high of 25.9% at end-Mar 2013. UMWH’s foreign shareholding reached its highest point of 25.9% at end-Mar 2013.

• Inexpensive valuations. Our previous discounted SOTP based target price does not fully reflect UMWH’s recovery in earnings and growth prospects. With strengthening prospects, we believe that our TP for UMWH should no longer be pegged to a discount to its SOTP. We raise our TP to MYR13.82 after removing the 10% discount previously assigned.

UMWH share price have moved up by 11% since our upgrade in Apr. With potential upside to our earnings forecasts, valuation remains compelling at just 13x FY15 earnings (11x FY15 PER ex UMWOG), supported by 3+% yield (based on 50% DPR).

Overall, UMWH is a blue-chip Shariah-compliant stock with earnings recovery, a net-cash position and undemanding valuations. Reiterate BUY.