UMW Holdings (UMWH MK; BUY; TP: MYR13.82): Wins MYR200m Myanmar contract, Tan Chong Motor (TCM MK; SELL; TP: MYR4.00): Disheartening 1H14; cut to SELL

UMW Holdings (UMWH MK; BUY; TP: MYR13.82): Wins MYR200m Myanmar contract

• What's New? The Star Business reported that UMW Engineering Services, a 100%-subsidiary of UMWH, has secured a MYR200m contract in Myanmar to supply ~60 units of Komatsu heavy equipment to the jade-mining industry.

Recall that jade-mining activities in Myanmar were suspended in May 2012 for security reasons. The government has recently announced that the suspension will be lifted effective 1 Sep 2014.

• What’s Our View? This contract is positive to UMWH but not unexpected as the development in Myanmar was highlighted in management’s recent NDR with us. The resumption of mining activities will offer more opportunities for UMWH to secure more orders for its Komatsu equipment in the near term.

Assuming a 12-15% pretax profit margin, we expect this contract to add MYR18-23m to UMWH’s bottomline. Our forecasts are unchanged, having imputed contract wins.

UMWH will be reporting its 2Q14 results on 27 Aug. We continue to like UMWH for its earnings recovery, driven by its Automotive and Equipment businesses, and exposure in 38%-owned Perodua and 55.2%-owned UMWOG (BUY; TP: MYR5.15). UMWH’s valuations remain undemanding at 13x FY15 PER, backed by 4% yields (based on 50% DPR).

Tan Chong Motor (TCM MK; SELL; TP: MYR4.00): Disheartening 1H14; cut to SELL

• What's New? 1H14 core net profit of MYR54m made up just 28%/21% of our/consensus initial full-year forecasts. Disappointing 2Q14 core net profit of MYR12m (-71% QoQ, -82% YoY) was due to (i) weaker vehicle sales (-15% QoQ, -12% YoY to 10k units) and ii) depressed EBITDA margin (-1.5ppts QoQ to 6.2%). Earnings were affected by intense price wars in the B-segment (Almera), which accounts for ~50% of TCM’s total vehicle sales. TCM has been aggressively offering discounts of up to MYR5-6k/car (6% of the ASP) since 1Q14 to compete with the newly launched Toyota Vios and Honda City in the market.

A single-tier dividend of 3sen, to go ex on 8 Sep, was declared.

• What’s Our View? The hefty price discounting strategy has continue into 2H14 and escalated during the Hari Raya sales campaign. Margins continue to be sacrificed for market share in the ongoing Merdeka celebration promotions. Peers’ Vios and City have started to offer MYR2k-4k/ car discounts each, intensifying competition.  

We cut FY14/15/16 earnings by 43%/24%/24% on i) lower vehicle sales assumption (-14%/-10%/-9%), ii) higher A&P expenses from the continuous rebates, and iii) higher operating expenses as a result of lower plant utilisation. Correspondingly, we cut our EBITDA margin estimates by 1-1.5-ppt for FY14-16. We now expect TCM to sell 43k/63k/68k cars in FY14/15/16.

We downgrade TCM to SELL with a lower MYR4.00 TP (unchanged 12x FY15 PER). Valuations are pricey at 26.8/15.5x 2014/15 PERs.