Friday, November 25, 2011

UOB Kay Hian Research: UMW's Hold call and RM6.90 target price under review

KUALA LUMPUR (Nov 25): UOB Kay Hian Research Malaysia said its Hold call and RM6.90 target price for UMW HOLDINGS BHD [] is under review pending an analysts briefing on Friday afternoon.

It said on Friday UMW's 9M11 core net profit of RM510 million is in line with its 2011 estimate, on an annualised basis.

UMW made a total of RM58 million in provisions, mainly for impairment of overseas investments. For 3Q11, core net profit of RM194 million improved 19% on-quarter, driven by the recovery of the automobile division.

UOB Kay Hian Research said the operating profits in 3Q11 for UMW's motor division jumped 41% on-quarter to RM371 million on the back of a 17% jump in revenue to RM2.6 billion.

The automobile industry was hit in 2Q11 by the earthquake/tsunami in Japan in end-March 2011. Subsequently, recovery in supply of automobile parts in 3Q11 enabled manufacturers to deliver their vehicles. Together with a weaker US dollar vs the ringgit, UMW's automobile division managed to record a strong 14% operating margin in 3Q11 vs 12% in 2Q11.

However, UMW's O&G division remained flat with pretax loss of RM22 million in 3Q11 (vs RM23 million in 2Q11) on the back of RM295 million in revenue (+3% on-quarter).

UOB Kay Hian Research said aside from a seasonally low 4Q11 ahead, the Malaysian automobile industry is hit once again this year. This time by the floods in Thailand, which restricted the supply of automobile parts and CBU vehicles.

'Using UMW's 2Q11 performance, when the group recorded core net profit of RM162 million, as a gauge for UMW's potential 4Q11, its 2011 net profit could come in slightly below'' forecast core net profit of RM707 million.

The research house said UMW still has RM52 million worth of overseas investments in its books (NBV). Assuming UMW provides about RM25 million each quarter (as it did in 3Q11), there could be only another two quarters of provisions left, until 1Q12.

'HOLD call and RM6.90 target price (11x 2012F PE) are under review, pending an analyst briefing this afternoon. We foresee little catalyst in this stock in view of weak vehicle sales next year. Global economic uncertainty, and potential credit tightening (that is, financing for car buyers) will cast a shadow over this cyclical sector.

'Further, there is little prospect of UMW's O&G division turning around in the near term as long as WSP faces stiff domestic competition (in China) following countervailing duties imposed by the US on steel imported from China,' it said.

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