UMW Holdings Bhd
(April 2, RM10.98)
Maintain hold with lower target price of RM10.10: Weak Toyota vehicle sales (93,000 units for the first two months of financial year 2015 ending December [FY15]), down 30% to 40% from its FY14 monthly average of 86,000 units, is expected to linger in March and April.

The sales underperformance was mainly due to stiff competition, especially in the B-segment from new price competitive launches (Honda City, Jazz, Mazda2), worsened by wary consumer sentiment due to the implementation of the goods and services tax. As such, we lower our FY15 Toyota sales forecasts by 17% to 75,000 units against management’s 100,000-unit target, which was recently raised from 93,000 units after the launch of the new D-segment Camry Hybrid.

Management also painted a cloudy FY15 for the oil and gas (O&G) division which is expected to be hit by: (i) higher immobilisation period between contracts; (ii) dry-docking expenses for two jack-up rigs; and (iii) lower debt coverage ratios amid weak oil prices.

These led to cuts in our earnings forecasts for UMW Holdings of 9% for FY15, for FY16 by 5% and for FY17 of 5%.

Recent developments — continuous weakening of the ringgit, poor Toyota vehicle sales and weaker expectations of 55.2%-owned UMW Oil & Gas Corp Bhd’s FY15 earnings — pose downside risks to consensus 2015 earnings. However, the positive would come from 38%-owned Perusahaan Otomobil Kedua Sdn Bhd (Perodua) with vehicle sales for the first two months of FY15 up 25% year-on-year.

Perodua is a beneficiary of: (i) a weak yen due to its yen-denominated component costs; and (ii) down-trading by consumers to more economical cars. 

We maintain our “hold” call on UMW Holdings as valuations are fair at 16.7 times FY16 price-earnings ratio, backed by an almost 4% yield (based on 65% dividend payout ratio). — Maybank IB Research, April 2

This article first appeared in The Edge Financial Daily, on April 3, 2015.