SHARES of UMW Holdings Bhd (UMWH) hit a three-month high of RM5.95 on Jan 27, one week after its biggest move yet to exit the oil and gas industry. This may just signal the end of its worst run since the 1998 Asian financial crisis.
The counter has continued to beat market expectations. Last Wednesday, it hit an intraday high of RM5.75 — 15 sen above the highest target price among analysts — before trending lower to close at RM5.26 last Friday.
However, CEO Badrul Feisal Abdul Rahim says UMWH’s share price should be higher.
“I think, yes, it is undervalued. I think there is still some value amid the current challenges that we are facing,” he says.
“That’s a problem we face when we have two listed companies. Sometimes, investors are confused: Are you an automotive or an O&G stock? So, I believe, to a certain extent, that O&G exposure does undervalue the automative stock, because the automotive sector has been doing very well.”
“With the new plant, it's a good investment stock.”
Shareholders, however, are unlikely to see cash dividends in FY2016 ended Dec 31, as UMWH is bracing for a new low before a rebound in FY2017. In contrast, the group gave out dividends in loss-making FY2015.
“I hope the shareholders will understand. But to me, the shares of UMW Oil & Gas Bhd (UMWOG) are theoretically a form of dividend. If you don't believe in O&G, you sell them on the market.
“But if you believe that the worst is over [for O&G], you should stay and wait for the stock to appreciate. That is our returns to the shareholders,” Badrul says.
UMWOG closed at 70.5 sen last Friday.
Badrul stresses that its non-listed O&G assets pose a significantly smaller financial burden compared with UMWOG. Besides, UMWH is poised to fully dispose of the capital-intensive venture by 2018.
After the O&G exit, UMWH will refocus on its automotive, equipment, and manufacturing and engineering divisions, gradually reducing reliance on the automotive sector.
“It is a long-term play as far as the three divisions are concerned,” Badrul says, brushing off concerns over a possible drop in demand for the three segments as cyclical.
If all goes well, UMWOG will be decoupled from UMWH by 2QFY2017, and this will hopefully arrest UMWH’s decline.
Shifting into high-value manufacturing, UMWH’s Serendah Rolls Royce plant will only contribute positively to the group in 2019, the same year its second Toyota plant is expected to commence operations.
A new Toyota model may roll out in 2HFY2017 and UMWH is talking with its principals to expand its Asean market to bring in more equipment products.
But there will be hiccups, analysts say.
Hong Leong Investment Bank (HLIB) analyst Daniel Wong says UMWH will face challenges from all fronts to boost car sales this year. “Its biggest competitor, Honda, will come up with two new editions for its flagship Jazz and City models, so UMWH will keep facing stiff competition,” he tells The Edge.
“UMWH sold only 65,110 Toyota vehicles last year. Consumer sentiment is still bad. The impact of the US dollar on the economy and the cost structure can make this year even worse,” he adds.
MIDF equity research analyst Hafriz Hezry says it is “pretty ambitious” for UMWH to aim to breach the 100,000 mark in Toyota sales this year, but there may be something to look forward to. “UMWH is in a sweet spot in its model life cycle, given the introduction of the new Toyota Vios late last year,” he tells The Edge.
On the plan to increase market reach for its equipment arm, Hafriz opines it may contribute to positive earnings, “depending on how quickly this can be executed”.
HLIB’s Wong says the plan is actually overdue. “Besides, the new markets mentioned — Myanmar and Laos — are small and are unlikely to make huge contributions.”
What do all these mean to investors?
“If you already have UMWH shares, you can hold,” Wong says. HLIB had a “buy” call, with a target price of RM5.60 as at Jan 20. Similarly, MIDF rated the counter a “buy” with a target price of RM5.15 on the same day.
TA Securities Research estimates that UMWH’s core automotive business will continue to flounder in the near to medium term. “The removal of UMWOG from our sum-of-parts valuation will lower our target price to RM3.54,” it says in a note. The research house had a “sell” call on the counter, with a target price of RM4.05 as at Feb 7.
For MIDF’s Hafriz, the worst is yet to come for UMWH. “Expectations are already very low for this stock. I would not rule out a significant rerating,” he says.
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