UMW Holdings (UMWH MK; HOLD; TP: MYR12.55): The tides have turned

UMW Holdings (UMWH MK; HOLD; TP: MYR12.55): The tides have turned

• What's New? Downgrade to HOLD on less rosy outlook for Auto and O&G divisions. Cut SOP-based TP to MYR12.55 (-9%) on lower valuations of 55.2%-owned UMWOG using DCF method (from PER).

Auto. We see potential earnings downside in the auto division which anchors UMWH’s earnings (~80% of PBT) from (i) a slowdown in Toyota sales due to intense competition and (ii) unfavourable forex as ~42% of group COGS comprises imported components denoted in USD, which has strengthened 5% over the past 3 months against the MYR. Our sensitivity analysis suggests a potential 11% downside to earnings on a full-year basis should the MYR remain weak against USD at USD1/MYR3.35 vs our forecast of USD1/MYR3.25. Our forecast for auto division are unchanged for now.

O&G. The steep fall in oil prices is likely to affect future oil exploration, to which UMWOG’s jack-up rigs (JUs) are deployed. We have cut UMWOG’s FY15/16 earnings by 9%/12% (assuming lower DCRs by USD10k-15k to c.USD150k). 55.2%-owned UMWOG contributes 17-25% to UMWH’s earnings; thus we have shaved UMWH’s FY15/16 earnings by 2% as a result. We have also lowered UMWOG’s valuations as we switch to a DCF (from PER) valuation method. Correspondingly, our SOP for UMWH has been lowered.

3Q14 results snippets. UMWH will release its 3Q14 results in the last week of November. While we expect a recovery from 2Q14 (MYR175m core net profit in 2Q14) from smaller losses in the non-core division, the better results may be partially offset by weakness in the auto division due to (i) slower vehicle sales (3Q14 Toyota/Perodua vehicle sales: -13%/-9% QoQ) and (ii) lower margins from higher A&P costs.

• What’s Our View? The risk-to-reward ratio has turned and UMWH’s current valuation ex UMWOG is fair at 13x 2015 PER. Downgrade UMWH to HOLD. Switch to MBM (BUY; TP: MYR3.42) for exposure in Perodua.