UMW Holdings Bhd (Dec 30, RM7.00)
Maintain add at RM6.85 with target price of RM7.25: UMW’s share price throughout 2011 has stayed relatively flat given a lack of rerating catalysts.
Commanding 44% of Malaysia’s automotive market (combined market share of 38%-owned Perodua and 51%-owned Toyota), the stock was dragged down by the negative sentiments clouding the Malaysian automotive sector given: (1) tight auto part supply caused by the March 2011 Japan earthquake; and (2) recent flooding in Thailand. The oil and gas division also continued to be a drag on 9MFY11’s earnings.
We estimate that 41%-owned subsidiary UMW-Toyota accounts for more than 75% of the group’s bottom line and hence a shortfall in sales volume will have an adverse impact on earnings forecast. For the Malaysian automotive sector, we may see a deterioration in 2012 sales volume and earnings given: (1) economic uncertainties in Europe and America; and (2) higher raw material costs (essentially from coil steel, aluminium, lead, copper, etc). With that in mind, we recently cut our FY12-13 EPS forecasts for UMW by 10%-16% in our recent 2012 Strategy Report after changes to the following assumptions:-
(1) FY12-13 Toyota sales cut by 5% to 93K and 98K respectively;
(2) FY12-13 Perodua sales cut by 3% to 192,000 and 199,000 respectively; and
(3) automotive Ebit margins cut by 1.5ppt to reflect higher raw material costs.
We now project relatively subdued three-year earnings compound annual growth rate (CAGR) of 4% over FY11-13. Also, earnings contribution from the group’s three rig assets (all chartered out) should be more pronounced in FY12.
In tandem with the earnings downgrade, our sum-of-parts-based fair value was lowered from RM7.90 to RM7.25. At our fair value, the implied valuation of 11.8 times CY12 EPS is at parity to the stock’s average five-year PER. While earnings forecasts were cut, we left our dividend forecasts unchanged.
We opine our assumed dividend payout ratios of 65% for FY12 and 61% for FY13 are reasonable, predicated on dividend payouts of between 61% and 66% over FY09-10. At current share price, investors can look forward to an attractive net dividend yield of 5.8% for 2012.
Maintain ADD. We expect emerging re-rating catalysts only towards 2HFY12 driven by: (1) the launch of Toyota Avanza replacement in 1QFY12; (2) the rollout of CKD Toyota Camry with a potential 40% local content by end-2QFY12; and (3) the potential listing of UMW Oil & Gas as its investments gain better earnings traction with the maturity of its assets. The group is continuously looking to streamline its investments while recognising that certain investments in which they do not have good management control should be divested at a suitable time and price (potential divestment of WSP Group). — Affin IB Research, Dec 30
This article appeared in The Edge Financial Daily, January 3, 2012.
Maintain add at RM6.85 with target price of RM7.25: UMW’s share price throughout 2011 has stayed relatively flat given a lack of rerating catalysts.
Commanding 44% of Malaysia’s automotive market (combined market share of 38%-owned Perodua and 51%-owned Toyota), the stock was dragged down by the negative sentiments clouding the Malaysian automotive sector given: (1) tight auto part supply caused by the March 2011 Japan earthquake; and (2) recent flooding in Thailand. The oil and gas division also continued to be a drag on 9MFY11’s earnings.
We estimate that 41%-owned subsidiary UMW-Toyota accounts for more than 75% of the group’s bottom line and hence a shortfall in sales volume will have an adverse impact on earnings forecast. For the Malaysian automotive sector, we may see a deterioration in 2012 sales volume and earnings given: (1) economic uncertainties in Europe and America; and (2) higher raw material costs (essentially from coil steel, aluminium, lead, copper, etc). With that in mind, we recently cut our FY12-13 EPS forecasts for UMW by 10%-16% in our recent 2012 Strategy Report after changes to the following assumptions:-
(1) FY12-13 Toyota sales cut by 5% to 93K and 98K respectively;
(2) FY12-13 Perodua sales cut by 3% to 192,000 and 199,000 respectively; and
(3) automotive Ebit margins cut by 1.5ppt to reflect higher raw material costs.
We now project relatively subdued three-year earnings compound annual growth rate (CAGR) of 4% over FY11-13. Also, earnings contribution from the group’s three rig assets (all chartered out) should be more pronounced in FY12.
In tandem with the earnings downgrade, our sum-of-parts-based fair value was lowered from RM7.90 to RM7.25. At our fair value, the implied valuation of 11.8 times CY12 EPS is at parity to the stock’s average five-year PER. While earnings forecasts were cut, we left our dividend forecasts unchanged.
We opine our assumed dividend payout ratios of 65% for FY12 and 61% for FY13 are reasonable, predicated on dividend payouts of between 61% and 66% over FY09-10. At current share price, investors can look forward to an attractive net dividend yield of 5.8% for 2012.
Maintain ADD. We expect emerging re-rating catalysts only towards 2HFY12 driven by: (1) the launch of Toyota Avanza replacement in 1QFY12; (2) the rollout of CKD Toyota Camry with a potential 40% local content by end-2QFY12; and (3) the potential listing of UMW Oil & Gas as its investments gain better earnings traction with the maturity of its assets. The group is continuously looking to streamline its investments while recognising that certain investments in which they do not have good management control should be divested at a suitable time and price (potential divestment of WSP Group). — Affin IB Research, Dec 30
This article appeared in The Edge Financial Daily, January 3, 2012.
