Lower target price for UMW

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UMW Holdings Bhd
(Oct 27, RM11.66)
Maintain hold with a target price of RM11.43:
In view of: (i) lower midterm oil price at US$80 (RM261.60) to US$90 per barrel from more than US$100 per barrel; (ii) negative sentiment; and (iii) lack of sizeable contract news flow for the upstream sector, our oil and gas analyst believes the oil and gas (O&G) sector no longer commands a premium valuation.

Thus, we have cut the targeted price-earnings ratio (PER) for UMW Oil & Gas Corp(UMW-OG) to 16 times from 20 times, with a lower target price of RM3.29 from RM4.12 previously.

Given the weak global crude oil price, oil majors might slow down or reduce capital expenditure (capex) on new projects which will have a negative impact on exploration and production companies including UMW-OG, which provides drilling services.

Decreasing oil price coupled with lack of near-term sizeable contracts news flow for the local upstream sector (including drilling services — UMW-OG will dampen investor sentiment.

Risks for UMW Holdings include: (i) prolonged tightening of hire purchase rules by banks; (ii) the slowdown in the local economy affecting car sales; (iii) global automotive supply chain disruption; (iv) appreciation of the greenback; (v) a plunge in the crude oil price; and (vi) a slowdown in O&G exploration.

The positives are: (i) UMW’s control of the largest market share of local total industry volume with leading brands
Toyota, Lexus and Perodua; (ii) the strong growth of the O&G division; and (iii) expanding reach of the manufacturing and engineering division into fast-growing China and India.

The negatives are: (i) high crude oil prices affecting margins of its oil-based products such as lubricants; (ii) tightening of bank lending rules; and (iii) intense competition from rival automotive marques.

Following our oil and gas analyst’s cut in UMW-OG’s target price, we cut our target price for UMW Holdings to RM11.43 from RM12.28 based on sum-of-parts. — Hong Leong Investment Bank, Oct 27

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This article first appeared in The Edge Financial Daily, on October 28, 2014.