UMW - BUY - 21 Aug 2008

UMW Holdings - Results above expectations (Results Note)



Price: RM5.85

Target Price: RM8.00

Recommendation: BUY



· 1H08 net profit beats expectations. 1H08 net profit of RM293.5m accounted for 56.9% of market consensus and 54.8% of our forecasts, driven mainly by the strong sales in Automotive (+56.7% YoY) especially Toyota.

· YoY, 2Q08 net profit grew by 42.1% to RM151.7m driven by improvement across all segments in particularly the Automotive. Operating margin also improved substantially to 8.6% from 4.0% on better production efficiencies, higher economies of scale and favourable FOREX movement.

· QoQ, 2Q08 net profit was up 7.0%. Toyota posted substantially higher contribution on the back of higher unit sales (+20.2%) mitigating lower contribution from Perodua which we estimate to have dropped by 34% to circa RM26m (associate level) despite higher vehicle sales (+7.7%). To blame could be due to upgrading works at its plant in Apr/May which had disrupted production. Utilisation was reduced to 80% from the usual >90%. As a result, contribution from associates was 11.9% lower, partially compensated by stronger contribution from Wuxi (+75.8% QoQ).

· Interim gross DPS of 15 sen is declared. We are confident the Group is on track to achieving its 2008 KPIs of minimum 14% ROE of 14% with dividend payout of at least 50%. The progressive dividend policy adds attractiveness to the stock and help to cushion any downside risks.

· Maintain forecasts. We keep our earnings forecasts unchanged despite a more challenging macroeconomic outlook in 2H08 given its diversified base underpinned by: (1) the Group's balanced car models portfolio of small and medium passenger car categories and (2) high demand for the Group's O&G products and services on the back of brisk E&P activities.

· Maintain BUY with unchanged Target Price of RM8.00 based on 16 PER. We believe current share price offers investors good opportunity to buy into UMW's early cycle of its O&G overseas ventures