UMW Holdings Berhad

Initiating Coverage :

UMW Holdings Berhad - Vroom To Grow


Investment Highlight

We initiate coverage on UMW with a BUY call and target price of RM11.20. Our target price is based on Sum-Of-Parts (SOP) valuation which implies 13.7x 2013F PER, in line with its average PE. We like UMW for its stable cash-generating automotive division whilst its Oil & Gas (O&G) segment renders exciting earnings potential. Potential listing of UMW’s O&G is expected to drive a major re-rating to the stock.

Automotive division unfazed by the new lending guideline. UMW’s 1H2012 automotive division recorded higher revenue of 18.6% yoy and PBT of 35.8% yoy translating into 71% and 91% contributions of total group revenue and PBT respectively. Notwithstanding fierce competitions from other marques, Perodua managed to increase its car sales by 16.9% yoy in 1H2012 vs 1H2011. Meanwhile Toyota and Lexus recorded a quantum leap of car sales of 24.4% yoy in 1H2012 vs 1H2011. Going forward, we expect the Group will continue its positive growth momentum backed by the new Toyota Camry as well as strong demand for the hybrid energy car, Toyota Prius.

O&G powering the future. O&G division has successfully turned into the black in 1Q12 with RM30m PBT against RM230m pre-tax loss in 2011 after previous years of losses. Although we witnessed the dip in revenue and PBT in 2Q12 of 13.7% qoq and 94.6% qoq respectively caused by the dry dock of Naga 1 and exchange loss of USTPL pursuant to the depreciation of Indian Rupee, we are confident that the Group will be able to sustain the positive future earnings on the back of: a) contribution from Naga 3 and its 15% increase in day-rate with effect 2Q2012 onwards, b) the proposed privatisation of WSP which will negate the Group’s requirement of impairment loss, c) higher contribution from USTPL in anticipation of higher utilisation rate of 50-60% in 2012-13 from current 30-40%.

Naga 4 to further spur O&G division. To further strengthen UMW’s status in the booming Oil & Gas arena, the Group has procured an ultra premium jack-up drilling rig worth RM684mil. Agreement has been signed and delivery slated in February 2013. The addition of Naga 4 is anticipated to pave the way for UMW to clinch more upstream jobs and compete with bigger players such as SapuraKencana and other foreign oil majors for exploration works. Currently, the Group has a total of three operational offshore drilling rigs.


Background

UMW is the leading industrial conglomerates with diverse and global interests. Its four main core businesses are the automotive, equipment, manufacturing and engineering, and oil and gas divisions. The Group has expanded beyond Malaysian shores and has an international presence in Singapore, Indonesia, Thailand, Myanmar, Vietnam, Papua New Guinea, Australia, Taiwan, China, India, Oman and Turkmenistan.


Automotive

UMW’s activities involve manufacture, market and distribute Toyota and Lexus cars. Under its wholly-owned subsidiary Assembly Services Sdn. Bhd, it manufactures and assembles Vios, Hilux, Innova, Fortuner and Hiace and also selected models of Hino and Daihatsu vehicles. Currently, the Group is the single largest shareholder of Perusahaan Otomobil Kedua Sdn Bhd (Perodua), the manufacturer of Malaysia’s second national car, which has a niche market in the affordable segment.


Equipment

The Group specialises in the marketing, sales and service of imported equipment from world-renowned manufacturers for the logging, construction, industrial, mining and agricultural sectors with respect to the heavy equipment, industrial equipment and marine and power equipment.

Heavy Equipment: Komatsu
Komatsu brand name managed to make inroads regionally by having franchise over Malaysia, Singapore, Myanmar and Papua New Guinea. As of todate, Komatsu stood at pole position in Malaysia garnering market share of 30%. In 2011, UMW Engineering Services Limited, Myanmar, clinched a contract exceeding RM300million from a consortium of jade miners to deliver a fleet of 250 units of medium and large sized Komatsu mining equipment.

Industrial Equipment: Toyota Forklift
Toyota Forklift has become a seemingly ubiquitous part of the industrial equipment brand in Malaysia clinching an astounding market share of 60%. It has remain indomitable for the past 38 years by remaining No.1 position in Malaysia with its stellar performance. Globally, UMW is the only Diamond member in the Premier Club Recognition Programme, awarded by Toyota Material Handling International(TMHI). As of todate, Toyota Forklift has ventured in leasing of its equipments.


Oil & Gas

With headquarters in Kuala Lumpur, the UMW Oil & Gas Division has operations across the Asia-Pacific region and Turkmenistan.

UMW established the Oil & Gas Division as one of the core businesses of the UMW Group, to tap the vast potential of the industry. UMW’s entry into the oil and gas sector has been through an assorted portfolio of greenfield investments and acquisitions. UMW complements the robust upstream activities of the oil and gas industry through five main businesses after ceases its operations in midstream and downstream activities:

- Manufacture of Oil Country Tubular Goods and Line Pipes
- Oil & Gas Exploration Operations
- Fabrication of Oil & Gas and Other Structures
- Provision of Oilfield Services
- Supply of Oilfield Products

Oil & Gas Exploration Operations
Naga 1, is a semi-submersible drilling rig which is jointly-owned by UMW and Japan Drilling Company on a 50:50 venture. It has a drilling capacity of 30,000 feet with operating water depth of 985 feet. Its major customer is Petronas Carigali Sdn. Bhd and had been awarded for a contract extension for 5 years with an estimated value of USD250mil in November 2010.

Naga 2 and Naga 3 are independent-leg cantilever jack-up rigs that have drilling depth capability of 30,000 feet and have a rated operating water depth of 350 feet. These ultra-premium jack-ups deliver higher drilling performance compared to older jack-ups. Naga 2 has since commenced operation in September 2010 with an estimated USD183 million contract awarded from its key customer HESS (Indonesia-Pangkah) Limited for 3.7 years. Meanwhile, Naga 3 has just renewed its contract with Petronas Carigali(PCSB) for a two-year extension worth USD105 million in March 2012. Thus, the contract value of USD52.5 million per annum is expected to lift up the earnings contribution for FY12-FY14. In late 2009, UMW acquired the entire remaining 49% stake in UMW Standard Drilling, thus making the latter a wholly-owned subsidiary of UMW. Hence, UMW has the added flexibility to make strategic decisions with regard to the two rigs.

To further strengthen UMW’s status in the Oil & Gas arena, the Group has procured an ultra premium jack-up drilling rig worth RM684mil soon to be Naga 4. Agreement has been signed and delivery slated for February 2013.

On June 2009 marked the official opening of Zhongyou BSS (Qinhuangdao). The company is a joint venture with a subsidiary in the China National Petroleum Corporation group and was formed to manufacture oil and gas transmission pipes for the 9,100 km-long, 2nd West-East Gas Pipeline that spans from Kazakhstan to Shanghai, China. In its first year of production, it has manufactured 127,473 metric tonnes of Spiral-SAW pipes and 88,687 metric tonnes of Longtudinal-SAW pipes. Through R&D, the company has developed offshore pipes for undersea pipelines.

United Seamless Tubular Private Limited, India(USTPL)
Stationed in Hyderabad, India, the plant commenced operations in August 2010. USTPL manufactures seamless pipes for the oil and gas sector in India, Middle East and the USA made its first shipment of 200 metric tons of pipes to Oil Country Tubular Limited, India in the same month of its production.

WSP Holdings Limited is an integrated manufacturer of seamless steel pipes and was listed on NYSE since December 2007 based in China. The company is a joint venture with Expert Master Holdings Ltd and it is a leading manufacturer of OCTG, comprising seamless casings, tubings and drill pipes used for oil and natural gas exploration, drilling and extraction. With 13 threading lines, 2 drill pipe production lines, 3 hot-rolling pipe lines, 1 inspection line , 2 steel billet factories and 1 cold-draw line, WSP is capable of large-scale production. WSP is 23% associate of UMW and has been sinking in the red due to the US anti-dumping policy. Despite H.D.S. Investment LLC has offered to take WSP private, however no decision has been make yet.


Manufacturing & Engineering

UMW has the exclusive marketing and distribution rights to Pennzoil while KYB-UMW Group manufactures high-quality shock absorbers and hydraulic power-steering pumps and systems. The Group’s Auto Components Division designs, manufactures and supplies parts and components to the automotive industry and one of the leading suppliers of OEM and replacement automotive products in Malaysia.


Investment Merit

Automotive division unfazed by the new lending guideline. UMW’s 1H2012 automotive division recorded higher revenue of 18.6% yoy and PBT of 35.8% yoy translating into 71% and 91% contributions of total group revenue and PBT respectively. Notwithstanding fierce competitions from other marques, Perodua managed to increase its car sales to 16.9% yoy in 1H2012 vs 1H2011. Meanwhile Toyota and Lexus recorded a quantum leap of 24.4% yoy car sales in 1H2012 vs 1H2011. Going forward, we expect the Group will continue its positive growth momentum backed by the new
Toyota Camry as well as strong demand for the hybrid energy car, Toyota Prius.

The new guideline introduced by Bank Negara in January 2012 marginally impinged on the loan approval hence the sales of Perodua slid marginally, -2% yoy or 918 units in 1Q12 vs 1Q11, which was brought down by Viva marque. However, car sales swiftly rebounded back in 2Q12 with increment of 7.7% qoq or 3437 units vs 1Q12. Meanwhile, Toyota and Lexus are not affected as these marques cater towards the middle-to-high end users.

Perodua invests heavily in Capex for 2012 and 2013 whereby it has earmarked RM200.5mil for FY12, which is used to improve existing production lines, products sales and after-sales services. In addition, a portion of capex will be spent on new flagship 3S centre located in Section 19, Petaling Jaya and is expected to embark operation in 2H13.

Muted impact on Toyota global cars recalled. UMW Toyota Motor has made known to conduct a special service campaign for Toyota vehicles sold in Malaysia to rectify a faulty power window switch totalling 63,083 units. The marques involved in the exercise are the Camry, Corolla Altis, Vios, RAV 4 and Yaris models produced between 2006 to 2010. We understand that UMW would only bear costs of CKD vehicles. For all that, there have not been any prevalent incidences of related component failure in the
domestic market.

Rosy outlook for equipment division. For Equipment division, the revenue and PBT surged in 1H12 by 29% and 53% y-o-y respectively versus 1H11 thanks to the strong demand from Myanmar and rescheduling machines deliveries in 1Q2012 due to bad weather in 2011. Moving forward, we deem the Equipment division will continue its positive performance in 2012F and 2013F with revenue growth of 15% and 8% respectively, albeit slower growth against 2010-2011 growth of 31-34%, as the heavy
industrial and marine & power equipment used for mining, construction and oil and gas industries are expected to be buoyant.

Heavy equipment sales driven by Myanmar and local infrastructure works. Following the Group’s successful venture into Myanmar by supplying 200 units of Komatsu mining equipment in 2011 with a contract size of RM300m, we believe UMW could leverage its chances to clinch more orders in tandem with Myanmar’s recent political and economic liberalisation with expectation of more infrastructure works being carried out to cope with the influx of foreign investment. Furthermore, initiative undertaken by the Malaysian government for ETP projects also benefits the Group’s Equipment division.

O&G powering the future. O&G division has successfully turned into the black in 1Q12 with RM30m PBT against RM230m pre-tax loss in 2011 after previous years of losses. The turnaround was mainly due to the contribution from Naga 3 and Hikaruyu 5 rigs, manufacture of OCTG and line pipes in India as well as lower impairment charges from its associates and investments. Although we witnessed the dip in revenue and PBT in 2Q12 of 13.7% qoq and 94.6% qoq respectively caused by the dry dock of Naga 1 and exchange loss of USTPL pursuant to the depreciation of Indian Rupee, we are confident that the Group will be able to sustain the positive earnings on the back of: a) contribution from Naga 3 and its 15% increase in day-rate with effect 2Q2012 onwards, b) the proposed privatisation of WSP which will negate the Group’s requirement of impairment loss, c) higher contribution from USTPL in anticipation of higher utilisation rate of 50-60% in 2012-13 from current 30-40%.

Naga 4 to further spur O&G division. To further strengthen UMW’s status in the Oil & Gas arena, the Group has procured an ultra premium jack-up drilling rig worth RM684mil. Agreement has been signed and delivery slated for February 2013. The addition of Naga 4 is anticipated to pave the way for UMW to clinch more upstream jobs and compete with bigger players such as SapuraKencana and other foreign oil
majors for exploration works. Currently, the Group has a total of three operational offshore drilling rigs.

Dividend aristocrat. UMW has consistently raised dividend payout and committed to pay out at least 50% of its profit net of unrealised gains or equivalent to c.30% of its reported net profit since 2007. In FY11, the dividend payout was 72.7% (profit net of unrealised gains) or 37% (reported net profit) equivalent to DPS of 31 sen/share or dividend yield of 3.2%. Assuming dividend payout of 33% for FY12-13F, it will translate into DPS of 41 sen in FY12 and 45 sen in FY13, or equivalent to decent dividend yield of 4.1% and 4.5% respectively.


Financial Highlight

The Group recorded total revenue of RM13,535.80m in FY11, registered 5.6% growth y-o-y. Auto division contributed the highest revenue of 72% followed by Equipment (15%), O&G (5%) and M&E (8%). As of 1H12, the Group also achieved topline growth of 22.7% yoy at RM1,448m mainly boosted Automotive division with the introduction of new Camry and Prius and also the Equipment segment in Myanmar’s mining and construction sectors.

Solid topline growth underpinned by Auto, Equipment and O&G divisions. Going forward, we estimate the Group to rake in revenue of RM14,934.4m for 2012F (+10.33% yoy),RM15,775.9m for 2013F (+5.6% yoy)and RM16,480.6m for 2014F (+4.5% yoy).Our assumptions for the Toyota and Lexus car sales are 96,000 units (+8.3% yoy), 100800 units (+5.0% yoy) and 105840 units (+5.0% yoy) for 2012F, 2013F and 2014F respectively; whilst Perodua car sales are estimated at 188000 units (+4.5%
yoy), 196836 units (+4.7% yoy) and 206677 units (+5.0% yoy) for 2012F, 2013F and 2014F respectively to be reflected under its associate level.

For Equipment division, we expect the revenue growth momentum to taper off from 31-34% in 2010-2011 to 15% in 2012F and continue to slide to 8% in 2013-2014F as the sales growth limited by the Group’s relatively higher local market share for its leading Komatsu brand (30%) and Toyota forklift (50%).

Meanwhile, UMW’s O&G segment is expected to continue its strong topline growth of 24.2% for 2012F before taper off to 7.3% in 2013F due to relatively high base growth of 74.2% achieved in 2011. However, our 2014F revenue growth of O&G division is estimated to decline 5.9% yoy as we have yet to factored in the contribution from Naga 4 (jack-up rig to be delivered in Feb 13 and contract value yet to be determined) and tail-end of the contract for Naga 2 & 3.

Rising net earnings on the back of improving margin. The Group net earnings plunged 4.71% y-o-y in 2011. The drop was mainly due to the non-recognition of deferred tax assets and no tax deduction for asset impairment losses. Despite all, the PBT spike up 5.20% from RM1,313.50 to RM1,381.50 in the year due to the significantly higher profit registered by the Oil & Gas segment, up 74.18% yoy. With the rigorous auto sales and the revival of Oil & Gas division, we expect the Group’s net earnings to grow at 19.45% 3-year CAGR from 2011 to 2014F supported by its PBT margin hike of 10.2% in 2011 to 13.1-13.8% in 2012-2014F.


Valuation & Recommendation

We initiate coverage on UMW with a BUY call and target price of RM11.20. Our target price is based on Sum-Of-Parts (SOP) valuation which implies 13.7x 2013F PER, in line with its mean PE. We like UMW for its stable cash-generating automotive division whilst its Oil & Gas (O&G) segment renders exciting earnings potential. Potential listing of UMW’s O&G is expected to drive a major re-rating to the stock.


Risk

Tightening guideline for loan approval. The implementation of new guideline in 2012 has adversely impacted the loan approval for car sales, particularly on low-to-mid range segment of car category such as Perodua’s Myvi, Viva and Alza.

Customers hold back on orders impending revised NAP. Soon-to-be-announced National Automotive Policy (NAP) could affect consumer sentiment as buyers stay on sideline waiting for possibility of gradual reduction of excise duty and import tax.

Foreign exchanges pressure. The Group’s transactions and overseas operations were denominated in foreign currencies, mainly US Dollar, Japanese Yen, Australian dollar, Chinese RMB and Indian Rupee and hence any unfavourable swing of foreign exchange rates could post negative results to the Group.

Sinking deeper for WSP Holdings Ltd. UMW’s 23% associate remains in the red operationally with the ongoing U.S. anti-dumping policy and countervailing of taxes. The total losses of c.RM89m fair value adjustment this year were accounted for the impairment charge for WSP. Potential of H.D.S Investment LLC(HDS) to privatise WSP shall mitigate the losses for the Group.

(Source: JF Apex Research)

I plan project for those rigs. xD

ESH wrote:I plan project for those rigs. xD

got tips?

lol i just know they got few projects in line already. but specific announcement date i dont know whether can give spike to the stock. roughly rate for rig is rm 1mil. so a few years should be hundred of millions.