We maintain our HOLD call on UMW with an unchanged fair value of RM6.50/share –following yesterday’s analyst briefing. Our SOP-derived valuation continues to peg UMW auto at 9x PE and its O&G and equipment divisions at 10x PE. Management is optimistic that 2H11 auto sales will more than make up for the shortfall in 2Q. While we acknowledge that supply has recovered, we would bear in mind that it is no longer just a supply issue that is plaguing the industry, but also a demand issue since the HPA amendment came into effect on 15 June. Management is currently sticking to its fullyear targets of 95,000 units for Toyota and 195,000 units for Perodua, but does not ruleout a downward revision.
On a positive note, the O&G segment is expected to return to the black, driven mainly by full- year contributions of UMW’s 3 rigs. Separately, UMW is considering exiting its fabrication business – as part of the group’s strategy to rationalise its O&G segment. While we are positive about the potential turnaround of UMW O&G, we are concerned that the turnaround may not be as strong as expected.Additionally, we are still sceptical about a strong recovery in 2H11 given:
(1) uncertainties in second-hand car values
(2) a longer purchase process
(3) a potential price war in 4Q11 when supply fully recovers.
All these could result in further earnings cuts by analysts in the near-term
by AMResearch
