Results: UMW Holdings (UMWH MK; HOLD; TP: MYR11.20), Post-briefing update: ViTrox Corporation (VITRO MK; BUY; TP: MYR4.05)

UMW Holdings (UMWH MK; HOLD; TP: MYR11.20): No surprises

• What's New? FY14 earnings within our and consensus forecasts. 4Q14 core net profit of MYR233m (+15% QoQ, +14% YoY) took FY14 core earnings to MYR832m (-7% YoY), meeting 98%/96% of ours and consensus full-year forecasts. Headline FY14 net profit included a net negative MYR174m from (i) loss on disposal of investments (MYR92m), (ii) impairment of assets/investments (MYR61m) and (iii) net loss on derivatives (MYR41m) but offset by (iv) gains on disposal of properties (MYR30m).

On a QoQ basis, stronger pretax profits from O&G and Equipment divisions in 4Q14 were offset by bigger losses in the non-core division (+4.7x to MYR184m loss) and weaker auto profits (-9% QoQ) on heavy price discounting despite growth in vehicles sales. Lower minority interests and taxes, and stronger associates’ contribution were the main saving grace, lifting core earnings growth by 15%.

A 16sen interim DPS, to be paid on 24 Apr 2015, was declared.

• Whats Our View?  We remain unexcited by UMWH’s near-term outlook especially in the auto division given intensive price wars in the B-segment market where Toyota’s best seller Vios competes. Our earnings forecasts are unchanged but we see some downside potentially stemming from (i) lower Toyota vehicle sales to be partially offset by stronger Perodua vehicle sales and (ii) lower O&G earnings as four of UMWOG’s existing jack-up rig contracts (for Naga 2, 3, 5, 7) are due for renewals in 2015 at potentially lower DCRs given the recent weakness in oil prices. 

ViTrox Corporation (VITRO MK; BUY; TP: MYR4.05): Insatiable hunger for growth

• What's New? Reiterate BUY with a higher TP of MYR4.05 (+14%), pegging it to 13.5x CY16 PER (from 12.6x). We remain excited on ViTrox’s near and mid-term earnings growth prospects post its FY14 results briefing yesterday. Key highlights:

Ø  3-month average book-to-bill ratio recovered to 1.05x in Jan 2015 from 0.84x in Dec 2014 on higher orders at ABI division.

Ø  Total order backlog stands at MYR18m as at mid-Feb 2015 and as such, 1Q15 revenue is expected to hit MYR33m-37m (-13%-22% QoQ, +45%-62% YoY). Recall that 1Q and 4Q are typically the weaker quarters for ViTrox. Nonetheless, profitability could sustain given that YTD forex has averaged MYR3.59/USD1 (+9% from 4Q14 effective rate of MYR3.30/USD1).

Ø  In FY15, management aims to hit MYR208m in terms of revenue (assuming forex of MYR3.30/USD1) with three key strategies in place: (i) grow customer base by 20% in key markets (i.e. China, Taiwan and US), (ii) launch new low cost products (i.e. low cost AOI, mini AXI) to cater to the mass markets and (iii) improve lead time and inventory management by 30%.

Ø  Operating margins to sustain between at 28%-30%, having considered (i) positive exposure to the strengthening USD and (ii) higher A&P expenses to capture a bigger market share.

• What’s Our View? We raise our FY15/16/17 net profit forecasts by 3%/8%/8% after incorporating a higher ABI sales volume, offset by (i) lower selling price from the launches of new low cost products, (ii) a higher effective tax rate of 12% (from 3%) in FY15, incorporating 2 quarters of taxable profits (2Q15 and 3Q15) from delays in its pioneer status extension. Valuation remains undemanding, BUY.
• 2015 key strategy – Hoshin Focus. Management reflected on Vitrox’s strengths and weaknesses in FY14 and aims to improve in FY15 in the following areas:

Ø  Grow its customer base by 20% in the key markets of China, Taiwan and US, by winning more approved vendor list (AVLs) from Tier-1 as well as Tier-2 and 3 electronics manufacturing services (EMS), contract manufacturing (CM) and outsourced assembly and test (OSAT) companies. Management intends to monitor its existing sales channel partners (SCPs) closely and appoint more new and efficient SCPs.

Ø  Launch new low cost products (i.e. low cost AOI, mini AXI) to cater to the mass markets, an opportunity loss in FY14. Management commits to spend on R&D to ensure progressive product development.

Ø  Improve long lead time experienced in FY14 and inventory management by 30% in FY15 through standardisation of parts used and processes, among other operational enhancements.

Ø  Management aims to achieve MYR208m revenue (+22% YoY) in 2015 (which assumes forex of MYR3.30/USD1) with its key strategies in place.

• Undemanding valuations. Although small (Market cap: MYR757m/USD210m) and rather illiquid (ADTV: USD0.2m), ViTrox is an under-researched Shariah-compliant growth stock (projected 2-year earnings CAGR of 17%) with strong balance sheet (net cash of MYR56m as at end-Dec 2014). Since the start of its operation in year 2000, ViTrox was never loss making and in FY14, core earnings 2.3x to MYR48.6m, recording a new high. Above all, ViTrox’s management are experienced and has a proven execution track record in the industry.

Share price has jumped 23% since our initiation exactly one month ago but we still see value in this stock with 2 near-term catalysts (stronger replacement cycle and positive USD exposure) supported by better earnings visibility in 1H15 as guided by management. Current valuation at 11x CY16 PER is still behind its closest global peers, Koh Young & Viscom, currently trading at 14x/17x FY16 PER respectively.

Tagging on a higher PER of 13.5x to CY16 EPS forecast of 30sen, we derive a new target price of MYR4.05 (previously MYR3.55). Our revised target PER is based on a smaller 5% discount to the average of global peer valuation of 14.1x CY16 PER (10% discount previously). At 13.5x, this implies +0.6 SD to its long-term mean of 10x. We think a smaller discount to the global peers valuation is justified considering Vitrox’s strengthened growth pace. Our new TP offers a 25% upside from the current levels. Yields are also decent of 3+% (based on 35% DPR). Reiterate BUY.