Initiating Coverage Initiating Coverage | UMW Holdings | 18 June 2013 (Member of Alliance Bank group)
PP7766/03/2013 (032116) UMW Holdings Neutral
18 June 2013 Automotive Bloomberg Ticker: UMWH MK | Bursa Code: 4588
Analyst Angeline Chin Positives mostly priced-in [email protected] +603 2604 3911 We initiate coverage on UMW Holdings Berhad (UMW) with a NEUTRAL rating and TP of RM13.60. While fundamentals have been improving particularly the oil & gas division, we believe most of the positives have already been priced-in given its strong price 12-month upside potential performance over past year. UMW is currently trading at CY13 and CY14 P/E of 16x and Target price 13.60 14x, respectively which are at premium to peers. On the other hand, we believe Current price (as at 17 Jun) 14.60 intensifying competition in the auto sector in the near term may negatively affect UMW’s Capital upside (%) -6.8 automotive segment and offset gains to be made in other segments. Net dividends (%) 3.9 Total return (%) -2.9 Intensifying competition in the auto sector We believe the local automotive industry has become increasingly more dynamic and Key stock information competitive; especially the non-national car segment. Toyota and its two other major Syariah-compliant? Yes Japan automaker rivals, Honda and Nissan, have been aggressive in their marketing Market Cap (RM m) 17,057.1 effort to recapture lost market share from US, European and South Korean marques. Shares outstanding (m) 1,168.3 The recent launch of Nissan Almera into the highly competitive B-segment market is Free float (%) 33.5 expected to intensify competition in the market, both national and non-national 52-week high / low (RM) 14.72 / 8.43 3-mth avg volume ('000) 2,122.0 segment. 3-mth avg turnover (RM m) 29.4 NAP review will lead to wait and see by potential car buyers Share price performance Another revision of the National Automotive Policy (NAP) is expected to be announced 1M 3M 6M in 2013 whereby more liberalisation measures may be undertaken. Absolute (%) 4.4 9.8 23.1 For the time being, potential car buyers may adopt a wait and see approach in view of Relative (%) 4.1 1.1 15.3 the impending new NAP, which could see the gradual reduction in import tax and excise
duty, in our view.
Share price chart Unlocking oil & gas value via an IPO UMW plans to list its oil & gas unit by 4Q this year. The group will divest 39% of its stake and retain a 61% stake in the soon-to-be listed company, UMW-OG Group. We believe the listing will unlock the value of its investment in oil & gas assets and the proceeds could be utilised to pare down borrowings (assuming UMW will undertake offer for sale). To note, UMW will recognise a one-off disposal gain from the listing of its O&G division. That said, earnings contribution would drop due to reduced equity holding post the IPO.
11.5% earnings CAGR over next 3 years We expect UMW to post an 11.5% earnings CAGR over the next 3 years, mainly driven by its oil & gas division. Major shareholders % The PBT contribution from oil & gas segment will increase by 183%, 57% and 23% in Permodalan Nasional Berhad 42.5 FY13, FY14 and FY15, respectively. Employees Provident Fund 14.0 The earnings growth is mainly supported by (1) new drilling rigs coming on stream i.e.
NAGA 4 in FY13 and NAGA 5 in FY14, and (2) higher charter rate for rigs upon contract renewal.
Valuation and recommendation UMW has significantly outperformed the FBMKLCI over the last 12 months. We believe further share price appreciation is now limited as most positives have been priced-in. UMW is currently trading at CY13 and CY14 P/E of 16x and 14x, respectively which are at premium to its peers as well as almost 2 standard deviations above its mean P/E of 12x. Our sum-of-parts derived target price of RM13.60, implies potential downside risk of - 2.9% (after taking into consideration the dividend yield of 3.9%). With that, we rate UMW as NEUTRAL.
All required disclosure and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission Initiating Coverage | UMW Holdings | 18 June 2013
SNAPSHOT OF FINANCIAL AND VALUATION METRICS
Figure 1 : Key financial data
FYE 31 Dec FY11 FY12 FY13F FY14F FY15F
Revenue (RM m) 13,535.8 15,863.6 16,372.2 17,269.2 18,066.6 EBITDA (RM m) 1,905.4 2,102.8 2,288.6 2,473.1 2,608.7 EBIT (RM m) 1,607.8 1,817.4 1,978.0 2,128.1 2,234.0 Pretax profit (RM m) 1,381.5 2,009.7 2,143.3 2,330.1 2,490.9 Reported net profit (RM m) 502.1 994.3 1,097.7 1,213.8 1,306.8 Core net profit (RM m) 836.7 941.9 1,097.7 1,213.8 1,306.8 EPS (sen) 43.0 85.1 94.0 103.9 111.9 Core EPS (sen) 71.7 80.6 94.0 103.9 111.9 Alliance / Consensus (%) 101.7 103.3 105.3 Core EPS growth (%) 42.1 12.4 16.5 10.6 7.7 P/E (x) 20.4 18.1 15.5 14.1 13.1 EV/EBITDA (x) 9.6 8.7 8.1 7.5 7.0 ROE (%) 11.8 20.5 20.7 20.9 20.6 Net gearing (%) 8.8 10.1 7.1 6.7 8.0 Net DPS (sen) 31.0 50.0 56.4 62.3 67.1 Net dividend yield (%) 2.1 3.4 3.9 4.3 4.6 BV/share (RM) 3.64 4.15 4.54 4.97 5.43 P/B (x) 4.0 3.5 3.2 2.9 2.7
Source: Alliance Research, Bloomberg
Figure 2 : 12-month forward P/E trend Figure 3 : 12-month forward P/B trend
P/E (x) P/E Average P/E +1/-1 SD +2/-2 SD P/BV Average P/BV +1/-1 SD +2 / -2 SD P/BV (x)
19 3.5
17 3.0 15 2.5 13
11 2.0
9 1.5 7
5 1.0 2009 2010 2011 2012 2013 2009 2012 2010 2011 2013
Source: Alliance Research, Bloomberg Source: Alliance Research, Bloomberg
2 Initiating Coverage | UMW Holdings | 18 June 2013
Figure 4 : Peer comparison EPS Growth Net Dividend Local Target Share Mkt Cap (%) P/E (x) P/BV (x) ROE (%) Yield (%) Company Call Currency price price (USD m) CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14
Malaysia UMW Holdings Neutral RM 13.60 14.60 17,057.1 16.5 10.6 15.5 14.1 3.2 2.9 20.7 20.9 3.9 4.3 Tan Chong Motors NR RM NR 6.71 4,380.4 109.5 16.2 13.2 11.4 2.0 1.8 16.6 16.9 2.2 2.4 DRB-Hicom NR RM NR 2.76 5,335.7 -69.5 12.6 11.5 10.2 0.7 0.7 5.9 7.1 1.9 2.2
Average 14.6 11.9 14.4 12.9 2.5 2.3 17.1 17.5 3.2 3.6
China/Hong Kong
SAIC Motor Corporation NR RMB NR 14.17 25,507.3 11.9 12.0 6.7 6.0 1.1 1.0 17.2 16.9 3.9 4.3 Great Wall Motor Co Ltd NR HKD NR 33.35 15,262.5 24.5 16.1 11.3 9.7 3.0 2.5 28.6 27.5 2.4 2.8 Dongfeng Motor Group NR HKD NR 11.42 12,680.5 7.6 7.4 7.9 7.4 1.2 1.1 16.5 15.2 1.8 2.0 WeiChai Power NR HKD NR 25.75 6,564.1 21.7 17.0 11.1 9.5 1.4 1.2 13.4 13.9 1.4 1.5 Brilliance China Automotive 5,615.4 28.6 22.2 11.6 9.5 2.7 2.1 25.4 24.2 0.4 0.5 Holdings NR HKD NR 8.67 Guangzhou Automobile Group NR HKD NR 8.02 7,974.0 116.7 44.6 16.2 11.2 1.2 1.1 7.8 10.3 1.8 2.4 Geely Automobile NR HKD NR 3.64 3,880.9 11.9 17.6 9.5 8.1 1.6 1.3 17.8 18.0 1.4 1.6 Zhongsheng Group NR HKD NR 8.72 2,144.7 67.9 37.6 10.5 7.6 1.5 1.3 15.2 17.5 1.8 2.5 Baoxin Auto Group NR HKD NR 6.20 2,043.3 120.7 33.3 9.2 6.9 2.4 1.8 29.6 31.2 1.6 2.3 China ZhengTong Auto Service NR HKD NR 4.18 1,190.5 56.6 33.3 7.7 5.8 1.0 0.8 13.2 15.3 0.1 0.3 Sinotruck HK NR HKD NR 4.05 1,441.0 350.0 51.1 17.8 11.8 0.5 0.4 2.8 4.0 1.5 2.0
Average 35.8 18.6 9.8 8.1 1.7 1.4 18.5 18.4 2.4 2.7
Indonesia Astra International NR IDR NR 6,950 28,449.0 3.0 14.5 14.1 12.3 3.4 3.0 25.4 25.0 3.3 3.7 Indomobil Sukses Int'l NR IDR NR 5,200 1,453.9 14.9 33.6 15.6 11.7 2.4 2.1 15.4 16.4 1.1 1.3
Average 3.6 15.4 14.1 12.3 3.4 2.9 24.9 24.6 3.1 3.6
Source: Alliance Research, Bloomberg Share price date: 17 June 2013
3 Initiating Coverage | UMW Holdings | 18 June 2013
BACKGROUND INFORMATION
Leader in Malaysia’s automotive industry
UMW Holdings Berhad (UMW) is a leading industrial enterprise which focuses on four strategic businesses namely, automotive, equipment, manufacturing & engineering and oil & gas industries. UMW was founded in 1917 when Chia Yee Soh, the group's founder, set up a small automotive spare parts shop named United Motor Works. In 1987, Permodalan Nasional Berhad (PNB) bought out UMW and become its major shareholders as the group experienced financial difficulty due to the economic crisis. Subsequently, UMW formed a joint venture company, Perodua, with Japanese partners and holds 38% of it. The company started operations in 1994 and Perodua Kancil (the second Malaysian car project) was introduced to the Malaysian market in August the same year.
Focuses on four strategic UMW has gradually expanded its business and ventured into equipment and manufacturing businesses - automotive, & engineering industry. The group started its oil & gas division in 2002 through an assorted equipment, manufacturing & portfolio of greenfield investments and acquisitions. Since then, automotive, equipment, engineering and oil & gas industries manufacturing & engineering and oil & gas division have become UMW’s core businesses.
Apart from Malaysia, UMW has international presence in Singapore, Indonesia, Thailand, Leads the Malaysia’s automotive Myanmar, Vietnam, Papua New Guinea, Australia, Taiwan, China, Hong Kong, India, Oman industry with 47.1% market share and Turkmenistan. It currently has a total of 128 branches, 191 dealers and staff strength of about 13,142. The group leads the Malaysia’s automotive industry with 47.1% market share via Toyota (17%) and Perodua (30.1%) marques in 2012.
Figure 5 : Key achievements / milestones of UMW
Source: Company, Alliance Research
4 Initiating Coverage | UMW Holdings | 18 June 2013
Figure 6 : Domestic and international presence
Source: Company, Alliance Research
Major shareholders
PNB and EPF are major UMW has 2 major shareholders, namely PNB and EPF, which hold approximately 42.5% and shareholders 14.0% stake in UMW (direct and indirect).
Management
The management of UMW is currently led by Datuk Syed Hisham Bin Syed Wazir, which was appointed as President & Group CEO in 2010. He has almost 30 years of professional experience, including senior management positions in the automotive field. He served as Managing Director of Edaran Otomobil Nasional Bhd from 12 May 2005 to 31 August 31 2009. Subsequently, he served as the Chief Operating Officer at Naza Kia Sdn Bhd and Naza Kia Services Sdn Bhd from December 2009 to August 2010.
Figure 7 : Board of directors
No. Name Designation 1 Tan Sri Asmat bin Kamaludin Group Chairman/Non-Independent Non-Executive Director 2 Datuk Syed Hisham bin Syed Wazir President & Group CEO/Non-Independent Executive 3 Dato’ Dr. Nik Norzrul Thani bin N.Hassan Thani Non-Independent Non-Executive Director 4 Dato’ Mohd. Nizam bin Zainordin Non-Independent Non-Executive Director 5 Dato’ Siow Kim Lun Independent Non-Executive Director 6 Wan Kamaruzaman bin Wan Ahmad Non-Independent Non-Executive Director 7 Dr. Leong Chik Weng Independent Non-Executive Director 8 Khalid bin Sufat Independent Non-Executive Director
Source: Company, Alliance Research
5 Initiating Coverage | UMW Holdings | 18 June 2013
BUSINESS STRUCTURE
UMW is involved in the automotive, equipment, equipment and manufacturing & engineering and oil & gas businesses in Malaysia and internationally. The automotive division is the largest contributor to the group’s revenue (72%), followed by equipment (13%), oil &
gas (10%) and manufacturing & engineering (4%) in FY12.
UMW plans to list its oil & gas unit by 4Q this year. The group will sell 39% of its stake in the IPO and retain 61% stake in the soon-to-be listed company, which will called UMW-OG
Group. The listing will only comprises of the drilling and oil field services while the other unprofitable oil & gas associate (mainly manufacturing of pipes and fabrication) will be classified under the “Other” division in the UMW Group going forward.
Figure 8 : Review of business segments
Manufacturing & Automotive Equipment Oil & Gas Engineering
UMW Toyota Motor Heavy Equipment Lubricants & Fluids Drilling Operations . Lexus . Construction . Pennzoil . Semi-submersible . Toyota . Mining . Repsol rig . Agriculture . Grantt . Jack-up rigs Perusahaan Otomobil . Forestry . GEP fluids & . Land rigs Kedua . Industrial coolants . Workover rigs . Perodua . Fire-fighting and oil spill Shock Absorbers / Oilfield Services Power Steering . Generator Industrial Equipment . KYB packages . Material-handling . Pipe coating equipment Auto Components . Pipe inspection, . Industrial cleaning . Filtration products repair & threading equipment . Metal stamping . Type & batteries . DENSO spark plugs Manufacture of Pipes & wiper blades . Seamless OCTG Marine & power . GEP filters & brake . SSAW Line Pipes equipment pads . LSAW Line Pipes . Industrial compressors Fabrication . Marine engines . Onshore & . Industrial standby offshore structures generators . Industrial cranes . Power products . CNG refueling Oilfield Products stations
Source: Company, Alliance Research
6 Initiating Coverage | UMW Holdings | 18 June 2013
AUTOMOTIVE
Automotive is UMW’s largest division, accounting for RM11.5bn or 72% of total revenue for Automotive is the largest division FY12. The group leads the Malaysia’s automotive industry with 47.1% market share via which contributed 72% of total Toyota (17%) and Perodua (30.1%) marques in 2012. The group has an extensive product revenue for FY12 range (sedan, MPVs, SUVs & 4WD, hybrid, van and sports) to capture different market
segment or niches. It currently has a broad sales network with 191 dealers (54 for Toyota and 142 for Perodua).
Figure 9 : UMW auto division structure
Source: Company
Figure 10 : Breakdown of Malaysia TIV’s market share (2012) Figure 11 : Sales unit by brands
200,000 2011 2012 180,000 Volkswagen Others 2.1% 14.9% 160,000 140,000 Hyundai, Kia Perodua 120,000 2.1% 30.1% 100,000 Honda 80,000 5.6% 60,000 Nissan 40,000 5.8% 20,000 0 Toyota 17.0% Nissan Honda Others Proton Proton Toyota 22.5% Perodua Volkswagen Hyundai, Kia
Source: Company Source: Company
7 Initiating Coverage | UMW Holdings | 18 June 2013
Figure 12 : Model range
Source: Company
Toyota - market leader in the non-national car segment
UMW, via its 51% owned subsidiary, UMW Toyota Motor, engaged in the Engaged in the manufacturing/assembly, marketing and distribution of the Toyota marque, and the manufacturing/assembly, marketing and distribution of Lexus vehicles. Note that Toyota is the market leader in the marketing and distribution of the non-national car segment in Malaysia and has maintained this leadership position for 23 Toyota marque, and the marketing consecutive years. The group sold 106,622 units of Toyota vehicles in 2012. Its top selling and distribution of Lexus vehicle models such as Vios, Hilux, Avanza and Camry have helped to maintain its remarkable business success beating other main rivals such as Nissan and Honda, which hold market share of 5.8% and 5.6%, respectively.
Besides, Toyota also launched its first hybrid model, PRIUS C in February 2012 and has been well received locally. Subsequently, a sportier variant of the PRIUS C, TRD Sportivo joins the line-up in January 2013. Meanwhile, UMW is also the exclusive distributor of Lexus vehicles in Malaysia since 2006.
Figure 13 : Models
Source: Company
8 Initiating Coverage | UMW Holdings | 18 June 2013
Figure 14 : Toyota and Lexus unit sales breakdown vs. market share
120,000 20% 18% 100,000 16%
14% 80,000 12%
60,000 10% 8% 40,000 6%
20,000 4% 2%
- 0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales (LHS) Market Share of TIV (RHS)
Source: Company
Perodua – market leader in the overall market
UMW is the single largest shareholder (38% stake) of Perodua, the manufacturer of Perodua has the largest market Malaysia’s second national car, which has a niche market in the affordable segment (A- share in both national-car and total segment). Perodua has the largest market share in both national-car and total TIV segment. TIV segment: 30.1% market share It captured 30.1% TIV market share in 2012. Perodua vehicles are exported to seven in 2012 countries, namely, UK, Singapore, Brunei, Fiji, Nepal, Mauritius and Sri Lanka.
Its popular model, Myvi was Malaysia’s best-selling model since it was launched in 2005. Myvi is Malaysia’s best-selling Myvi is a subcompact hatchback model targeted to female and first time car buyers. Besides, model since it was launched in 2005 Perodua also produces small compact car- Viva, which has a smaller engine capacity (cc) and cheaper price. On top of that, the Perodua Alza is a compact MPV produced by Perodua targeted at young families and urban singles.
Perodua is setting up a new plant in Rawang to produce additional 100,000 vehicles yearly on Setting up a new plant in Rawang a one-shift cycle on top of the existing plant which is able to produce 200,000 units per annum, on a two-shift cycle. The new plant is expected to be completed by mid-2014. In tandem with the increase in capacity, Perodua has projected to export 20,000 vehicles overseas by 2015. It has produced 194,985 units (including export) for 2012.
Figure 15 : Perodua unit sales breakdown vs. market share
200,000 35% 180,000 30% 160,000 140,000 25% 120,000 20% 100,000 80,000 15% 60,000 10% 40,000 5% 20,000 - 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unit Sales (LHS) Market Share of TIV (RHS)
Source: Company
9 Initiating Coverage | UMW Holdings | 18 June 2013
EQUIPMENT
The equipment division is the second largest contributor to the group in terms of revenue Second largest contributor to the and profit in FY12. This division can be categorised into three main segments: heavy group in terms of revenue and equipment, industrial equipment and marine & power equipment. Its products are being profit in 2012 used in various industries (agriculture, construction, forestry, mining, industrial &
manufacturing and industrial cleaning – food and beverage, material handling and logistics).
Figure 16 : Equipment division
Source: Company
Heavy equipment
31.1% market share of heavy UMW has built a strong reputation in the construction industry, providing heavy equipment equipment industry in Malaysia from renowned brands around the world. Some of the products include excavators, concrete pumps, loaders and rollers. It currently holds the Komatsu franchise in Malaysia, Singapore, Papua New Guinea and Myanmar. UMW has a strong presence in the heavy equipment industry in Malaysia with an overall market share of 31.1%. Besides, its operation in Myanmar also performed well due to the strong demand for machines from the jade mining industry.
Industrial equipment
This division focuses on industrial equipment, material handling equipment and industrial Toyota forklift is one of the top 5 power products. The products include forklifts, towing tractors, warehouse trucks, distributors in the world and it has compressors and road sweepers. Toyota forklift is one of the top 5 distributors in the world maintained its No.1 position in and it has maintained its No.1 position in Malaysia for more than 38 years with 50% market Malaysia for more than 38 years share in the material handling equipment business.
Marine and power equipment
UMW also offers marine and power equipment such as industrial compressors, marine engines, generating sets and portable power products in this division for more than 40 years. Its business partners comprise some of the world’s leading multinational names such as CompAir, Cameron, Mitsubishi and Honda.
10 Initiating Coverage | UMW Holdings | 18 June 2013
OIL & GAS
In order to reduce the reliance on automotive, manufacturing and engineering and UMW started its oil & gas division equipment segment activities, UMW started its oil & gas division in 2002 through an assorted in 2002 through an assorted portfolio of greenfield investments and acquisitions. Apart from Malaysia, the oil & gas portfolio of greenfield investments division currently has operations in Australia, China, India, Indonesia, Oman, Singapore, and acquisitions Taiwan, Thailand, Turkmenistan and Vietnam. This division consists of five key segments:
Manufacture of oil country tubular goods and line pipes
Oil & gas exploration operations and development operations (drilling)
Fabrication of oil & gas and other steel structures
Provision of oilfield services
Supply of oilfield products
The anchor of the oil & gas division is the drilling business and UMW currently has a fleet of four offshore drilling-rigs (NAGA 1, 2, 3 and 4). NAGA 1, a semi-submersible drilling rig, is co- The group currently has a fleet of owned with Japan Drilling Co. Ltd. The group also owns and operates two premium jack-up four offshore drilling-rigs (NAGA 1, drilling rigs, NAGA 2 and NAGA 3. NAGA 1 and NAGA 3 are contracted out to Petronas 2, 3 and 4) Carigali Sdn. Bhd. for operations in Malaysia, while NAGA 2 operates in lndonesia for HESS (Indonesia-Pangkah) Limited. NAGA 4 is a new jack-up drilling rig which was recently
delivered in Feb 2013. NAGA 4 has been chartered out to Petronas Carigali for a duration of three years, with an option to extend for another two years.
The group has recently announced the acquisition of a fifth drilling rig for a total consideration of USD223m. The new rig is expected to be completed and delivered by May 2014.
Figure 17 : Details of UMW’s major rigs
NAGA 1 NAGA 2 NAGA 3 NAGA 4 To be named Ownership 50% * 100% 100% 100% 100% Year of build 1974 2009 2010 2013 2014 Gross tonnage (tons) 16,394 9,627 9,627 10,450 - DWT (tons) 21,120 5,834 4,366 3,500 - Drilling depth (feet) 30,000 30,000 30,000 30,000 30,000 Operating water depth (feet) 985 350 350 400 400 Customers Petronas Carigali HESS Petronas Carigali Petronas Carigali - (Indonesia-Pangkah) Contract period 5 years from Nov 2010 3.7 years from Sep 2010 2 years from Mar 2012 3 Years from 2H 2013 (with two- Extention for another 2 years year renewal option) - commencing Aug 2016 Contract value USD250m (5 years) USD183m USD105m USD157.68 - USD130m (2 years extension) Remarks Went through a major Will provide the NAGA 2 rig and The rig is currently under refurbishment exercise in 2012, related services to PetroVietnam construction and is expected to extending its life span for in MAY 2013 after completing its be completed and delivered by another 15 years contract with HESS. May 2014
* JV with Japan Drilling Co. Ltd
Source: Company, RigZone, Maritime Connector
11 Initiating Coverage | UMW Holdings | 18 June 2013
UMW’s oil and gas investments also include a 22.3% stake in WSP Holdings Limited (WSP), WSP has agreed to take the which is listed on the New York Stock Exchange. WSP is a leading manufacturer of Oil company private in 2Q13 Country Tubular Goods (OCTG) in China. The company offers casing, tubing and drill pipes used for oil and natural gas exploration, drilling and extraction. Note that WSP is a loss- making entity as the company has been adversely affected by the anti-dumping and countervailing duties imposed by the United States of America on OCTG imported from China. WSP has agreed to take the company private in a statement released on 21 February 2013. This privatisation is expected to be completed by the second quarter of 2013.
Excluding the impairment charges due to unfavourable fair value movements in hedging instruments and overseas investments, UMW’s oil & gas division has successfully turned around in 2011, primarily due to the contributions from its three offshore drilling rigs (NAGA 1, 2 and 3). This division continued to perform well in 2012 with 22.4% growth in revenue.
MANUFACTURING & ENGINEERING
Manufacturing & engineering is the smallest business division of UMW as it only contributed Manufacturing & engineering is the about 4% of the group’s total revenue in FY12. The group has the exclusive marketing and smallest business division to UMW distribution rights for Pennzoil (lubricants to vehicles). UMW is also the principal agent for REPSOL to distribute the REPSOL brand of lubricants throughout Asia (China, Malaysia,
Singapore, Brunei, Papua New Guinea and Myanmar).
Besides, two of its subsidiaries, KYB-UMW Malaysia and KYB-UMW Steering Malaysia continued to be the largest shock absorber and power steering pump manufacturers in Malaysia and market leaders in the OEM and replacement automotive products markets.
The group also has a blending plant in Xinhui, China with an annual output capacity of 50m litres. The plant, which blends and distributes REPSOL and GEP branded lubricants, has expanded the distribution network to South, West and Central China, Hong Kong and Macau. UMW also has presence in India where one of its Indian’s subsidiaries, UMW Dongshin Motech, is a major OEM for stamped automotive body parts for car manufacturers in India. Its customers in India include General Motors, Volkswagen, Tata and Hyundai.
Figure 18 : Key products
Source: Company
12 Initiating Coverage | UMW Holdings | 18 June 2013
INVESTMENT CASE
Intensifying competition in the auto sector
We believe the local automotive We believe the local automotive industry has become increasingly more dynamic and industry has become increasingly competitive; this is especially for the non-national car segment. Toyota, together with the more dynamic and competitive other two Japan automaker rivals Honda and Nissan, has been aggressive in marketing their cars to recapture lost market share to U.S, European and South Korean marques. The newest entry of Nissan Almera into the highly competitive B-segment market is expected to intensify competition in the market, both national and non-national segment.
UMW expects Toyota sales to reach UMW expects Toyota and Perodua sales to reach 105,000 units (-1.5% y-o-y) and 194,000 105,000 units (-1.5% y-o-y) and units (+2.6% y-o-y), respectively in 2013. Toyota will only launch 1 new model this year while Perodua sales of 194,000 (+2.6% y- Lexus will introduce 1 or 2 new models but sales volume is expected to be very low. o-y) in 2013 Management highlighted that a 3rd-generation Toyota Vios (new model) is targeted to be launched in Malaysia by 3Q. Meanwhile, the highly speculated new Toyota Corolla Altis model will only be launched in 2014.
Duty exemption on hybrid cars has On the other hand, the exemption of hybrid cars from import and excise duties until 31 led to a surge in sales December 2013 has led to a surge in hybrid vehicle sales. The sales of hybrid cars had increased 84% to 15,355 units compared to 8,334 units in 2011. We gather that Toyota’s compact hybrid model, Toyota PRIUS C, has been extremely well received by customers since its introduction in February 2012. Management highlighted that over 4,000 units have been sold as at 11 Jan 2013 and demand continues to be high as it is one of the most affordable hybrid models available in the market.
To capitalise on the demand trend, UMW Toyota Motor has added a TRD Sportivo version to its PRIUS C line-up in January, which is priced at RM103,990 compared to PRIUS C at RM97,300. Nonetheless, we believe the newly launched of Honda Jazz hybrid CKD (complete knock-down), Honda Insight and CR-Z may threaten the sales of Toyota Prius C due to competitive pricing. In-terms of market share, Honda is still the market leader in Hybrid segment with 57% market share in 2012, followed by Toyota ( 37%), Lexus (6%) and Porsche (<1%).
In a nutshell, we do not rule out the possibility that Toyota might lose market share to its rivals if the launch of new models do not take place in time.
Figure 19 : Toyota PRIUS C and Toyota PRIUS C TRD Sportivo
Source: Toyota Malaysia
13 Initiating Coverage | UMW Holdings | 18 June 2013
As for Perodua, it has recently launched its new 2013 S-series line, the Perodua Myvi 1.3 SE, Perodua has recently launched its the Perodua Viva S and the Perodua Alza S which are expected to be the main sales drivers new 2013 S-series line, which is this year. The S-Series models are facelift models which are set to replace the current Viva expected to be the main sales BZ, Myvi 1.3 Premium and standard Alza variant. The S-Series models are expected to make driver this year up 45% of Perodua’s total sales for 2013. Besides, a 3-year free service for all models (deal is worth RM1,100 to RM1,200) is expected to be one of the attractive points to lure buyers.
Figure 20 : Perodua S-Series
Source: Toyota Malaysia
Unlocking oil & gas value via an IPO
UMW is undergoing a restructuring exercise for its oil & gas division. The higher revenue Undergoing a restructuring exercise contributions from NAGA 1, NAGA 2 and NAGA 3 coupled with higher day-rate has helped to for its oil & gas division turnaround the segment after two consecutive years of losses. Management expects this division to perform better in FY13 mainly driven by full year contribution from NAGA 1, NAGA 4 (newly secured contract) and the commissioning of the new Electric Resistance Welded (ERW) and coating plant in China. To recap, UMW did not enjoy a fully contribution from NAGA 1 in FY12 as rig upgrading works were carried out for a duration of 281 days (from 13 Apr 2012 until 18 Jan 2013).
Planning to list its oil & gas division On the other hand, UMW is planning to list its oil & gas division by 4Q of 2013. The group will by 4Q 2013 sell 39% of its stake in the IPO and retain 61% stake in the soon-to-be listed company, which will called UMW-OG Group. The listing will only comprises of the drilling and oil field services while the other unprofitable oil & gas associate (mainly manufacturing of pipes and fabrication) will be classified under the “Other” division in the UMW Group going forward.
We believe the listing could unlock the value of its investment in their oil & gas assets and the proceeds could be utilised to pare down borrowings (assuming UMW will undertake offer for sale). The listing could be also one of the best alternatives to fund future capex requirements for the oil & gas business. To note, UMW will recognise a one off disposal gain (which depends on the listing price and size of disposal) from the listing of the O&G division. That said, earnings contribution would also drop due to reduced equity holding post the IPO.
14 Initiating Coverage | UMW Holdings | 18 June 2013
The newly delivered jack-up drilling rig, NAGA 4 has been chartered out to Petronas Carigali No issue in securing new contract for a duration of three years with higher chartered rate (approximately USD146,000 per day), with an option to extend it for another two years. We view that PETRONAS’s local preference policy is beneficial to UMW, as their Malaysian flagged rigs would be preferred over foreign- owned rigs. A key local competitor for now is Perisai Petroleum Teknologi, who has not yet take delivery of their first rig. To note, we do not consider SapuraKencana as a direct competitor as they focus on tender barge rigs.
5th rig to be delivered by 2Q 2014 The group has also recently announced the acquisition of its fifth drilling rig for a total consideration of USD223m. The new rig is expected to be completed and delivered by May 2014. Management has guided that the group has submitted several bids in Malaysia and within ASEAN, and is confident of securing at least one long-term contract. Thus, the acquisition will enable UMW to capture available business opportunities on the back of current high demand for rigs.
We highlight that demand for offshore drilling services has been propelled by a surge in E&P Well-positioned to capitalise on activities as Malaysia looks to transform itself into a regional oil & gas trading hub by 2020. Petronas’ preference for locally- Local oilfield service providers (especially for the upstream players) are in the midst moving owned rigs into a boom cycle, leveraging on the government's interest in promoting the country's petroleum industry and PETRONAS’s planned capex of RM60bn per annum (RM300bn over 5 years). We believe UMW is well-positioned to capitalise on PETRONAS’ preference for locally-owned rigs and its continued support in developing local oil & gas service companies. More jack-up rigs and lift boats are expected to be deployed in 2013 to meet continuing strong demand within the oil and gas industry. On the other hand, we gather from Rigzone website that jack-up rig utilisation is healthy globally and has increased from 79% one year ago to 83.1% utilisation now.
Figure 21 : Historical competitive offshore rig utilization by rig type
Rig Type Current Month Ago 6 Months Ago 1 Year Ago Drill Barge 80.0% (8/10) 80.0% (8/10) 90.0% (9/10) 80.0% (8/10) Drillship 82.9% (68/82) 82.7% (67/81) 84.8% (67/79) 81.3% (61/75) Inland Barge 0.0% (0/1) 0.0% (0/1) 0.0% (0/1) 100.0% (1/1) Jackup 84.0% (342/407) 83.2% (337/405) 82.1% (320/390) 79.0% (305/386) Semisub 91.1% (173/190) 90.0% (171/190) 82.1% (156/190) 81.2% (151/186) Tender 81.3% (26/32) 74.2% (23/31) 82.8% (24/29) 86.2% (25/29)
* Utilization numbers are based on a snapshot rig count. Only competitive rigs are included.
Source: Rigzone
15 Initiating Coverage | UMW Holdings | 18 June 2013
Figure 22 : Type of drilling units
Source:Rigbook
Figure 23 : Onshore and offshore drilling
Source:Rigbook
New NAP – A wait and see approach
Another revision of the National Another revision of the National Automotive Policy (NAP) is expected to be announced in Automotive Policy (NAP) is 2013 whereby more liberalisation measures may be implemented. We opine that gradual expected to be announced in the liberalisation will help to improve market sentiment and increase TIV as consumers tend to near term replace their vehicles more frequently, given a wider variety of competitively priced models. We believe the up-coming review of NAP may lead to the reform of the whole local automotive industry to compete with Thailand or even Indonesia's automotive industry.
For the time being, some consumers are still adopting a wait and see approach in view of the Consumers are expected to adopt a impending NAP review, which would see the gradual reduction of import tax and excise duty, wait and see approach in view of in our view. Besides, as the domestic automotive industry already strives towards higher the impending NAP review component localization, a review of tax structure in the auto sector is highly anticipated.
16 Initiating Coverage | UMW Holdings | 18 June 2013
Decent dividend payout ratio
We believe a steady dividend payout is part of the long-term strategy of UMW to provide Dividend payout ratio of 58% to attractive risk-adjusted returns to its stockholders. The group has consistently pay out 58% to 76% over the past five years 76% of its net profits as dividends in the past five years. UMW has a dividend policy of paying out at least 50% of its PAT. We are forecasting a dividend payout of 60% from FY13 throughout FY15. This translates into a dividend yield of 3.9% - 4.6% for FY13-FY15.
Figure 24 : Dividend payout ratio Figure 25 : Dividend per share
% of PAT (sen) 80 76 80 73 70 70 67.1 61 62.3 58 59 60 60 60 60 60 56.4 49 50 51 50.0 50 45 50 40 40 37.0 31.0 28 30.0 30.0 30 30 19.0 20.5 20.0 20 20 12.0 10.5 10 10 0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2013F 2014F 2015F
Source: Company, Alliance Research Source: Company, Alliance Research
FINANCIAL HIGHLIGHTS
Sterling performance in FY12
UMW posted a sterling performance in 2012 where its core net profit (excluding exceptional Higher revenue from the items) surged 22.8% and surpassed the RM1bn mark for the first time in the group’s history. automotive (+18.8% y-o-y) and oil The commendable results were mainly driven by higher revenue from the automotive & gas segment (+39.9% y-o-y) (+18.8% y-o-y) and oil & gas segments (+39.9% y-o-y). On top of that, the equipment and manufacturing & engineering segments also showed some improvement.
Automotive division registered strong revenue growth due to the higher TIV number achieved. For 2012, Toyota and Perodua reported 294,024 units of total vehicle sales, an increase of 8.7% or 23,480 units compared with 270,544 units in 2011. With that, the group’s market share has also improved by 2 percentage point to 47% in 2012. Note that the group has launched 7 new models in 2012(Toyota Avanza, Toyota Prius C-1.5 hybrid, Lexus GS series, Lexus RX series, Toyota Camry, Toyota 86 and Lexus LS series).
On the other hand, the oil & gas division also witnessed a strong growth of 39.9% in revenue. The oil & gas segment has turned to the black in FY12 and contributed a profit of RM57.1m against a loss of RM245.9m in FY11. The full-year contribution from NAGA 3, additional revenue contribution from the Garraf Power Plant Phase 1 project and higher contribution from HAKURYU 5, a semi-submersible drilling rig were the main contributors to earnings growth.
17 Initiating Coverage | UMW Holdings | 18 June 2013
Figure 26 : Revenue breakdown by segment (FY12) Figure 27 : PBT breakdown by segment (FY12)
Equipment Automotive 14% Equipment Manufacturing 72% Manufacturing Automotive 9% and Engineering and Engineering 88% 0% 4% Oil and Gas Oil and Gas 10% 3%
Source: Company, Alliance Research Source: Company, Alliance Research
FY13 earnings would be driven by oil & gas division
We believe intensifying competition in the automotive segment could result in higher sales & Slowdown in earnings growth due marketing expenses. On top of that, generous incentives coupled with rebate and financial to competition in automotive deal to maintain high sales volume may also weigh on margins and earnings. industry
We expect Toyota & Lexus sales to reach 106,000 units (-0.6% y-o-y) in FY13, to be slightly
better than management’s forecast of 105,000 units. Historically, management has given Flattish TIV very conservative guidance in-terms of sales volume.
Nonetheless, the slowdown in the automotive segment will be offset by the strong growth in
the oil & gas segment. We expect better earnings this year mainly driven by higher Better earnings prospect from O&G contribution from the drilling segment. Note that UMW will receive full year contribution
from NAGA 1 after the completion of rig upgrading works on 18 Jan 2013, higher day rate for
NAGA 2 and the maiden contribution from the new delivered jack-up rig, NAGA 4. Overall,
we expect UMW to register a core earnings growth of 16.8% to reach RM1,097.7m in FY13 16.8% PAT growth underpinned by 3.2% increase in revenue.
Moderate earnings growth in FY14 and FY15
We expect moderate earnings We expect revenue to grow at three-year CAGR of 4.4% between FY12 - FY15. We expect the growth in FY14 and FY15 revenue contribution from automotive will increased by 4.2% and 3.2% in FY14 and FY15, respectively. The completion of Perodua’s second manufacturing plant by mid-2014 will boost its capacity by another 50% or additional 100,000 units per annum. Note that the new plant will be running on a one-shift cycle compared to a two-shift cycle at the existing plant.
Besides, the PBT contribution from oil & gas segment will increase by 57% and 23% in FY14 and FY15, respectively. The earnings growth is mainly supported by (1) full year contribution from NAGA 4 and the fifth jack-up rig (potentially to be named as NAGA 5), (2) higher charter rate for rigs, and (3) margin improvement.
Higher day rate and maiden Note that NAGA 5 will be delivered in May 2014 and we had already factored in higher day contribution from NAGA 5 rate and maiden contribution into our forecast. Overall, we expect 11.5% three-year earnings CAGR over the FY13 - FY15 period.
18 Initiating Coverage | UMW Holdings | 18 June 2013
Figure 28 : Revenue breakdown (RM m)
20,000
15,000
10,000
5,000
0 FY12 FY09 FY10 FY11 FY13F FY14F FY15F Automotive Equipment Manufacturing & Engineering Oil and Gas Others
Source: Company, Alliance Research
Figure 29 : PBT breakdown (RM m)
2,750
2,250
1,750
1,250
750
250
-250 FY09 FY10 FY11 FY12 FY13F FY14F FY15F
Automotive Equipment Manufacturing and Engineering Oil and Gas Others
Source: Company, Alliance Research
Figure 30 : Segmental breakdown with forecast FY09 FY10 FY11 FY12 FY13F FY14F FY15F Revenue Automotive 8,347.3 9,935.8 9,699.0 11,498.1 11,595.9 12,080.4 12,472.8 Equipment 1,172.0 1,570.8 2,078.9 2,138.5 2,198.7 2,262.8 2,328.8 Manufacturing & Engineering 486.5 640.9 670.4 699.6 734.5 771.3 809.8 Oil and Gas 693.0 633.3 1,109.6 1,551.0 1,866.6 2,178.3 2,478.8 Others 22.1 39.4 (22.2) (23.5) (23.5) (23.5) (23.5) Total 10,720.9 12,820.2 13,535.8 15,863.6 16,372.2 17,269.2 18,066.6
PBT Automotive 738.2 1378.0 1547.9 1796.8 1803.2 1899.9 2000.9 Equipment 83.5 103.9 70.5 183.5 202.6 201.0 201.4 Manufacturing and Engineering 23.1 39.1 (11.9) 3.6 6.2 5.7 6.0 Oil and Gas 37.7 (180.4) (245.9) 57.7 163.1 255.2 314.3 Others (36.0) (27.4) 4.7 (31.8) (31.8) (31.8) (31.8) Total 846.5 1313.2 1365.3 2009.7 2143.3 2330.1 2490.9
PBT margin Automotive 8.8% 13.9% 16.0% 15.6% 15.6% 15.7% 16.0% Equipment 7.1% 6.6% 3.4% 8.6% 9.2% 8.9% 8.6% Manufacturing and Engineering 4.7% 6.1% -1.8% 0.5% 0.8% 0.7% 0.7% Oil and Gas 5.4% -28.5% -22.2% 3.7% 8.7% 11.7% 12.7% * including adjustments and eliminations
Source: Company, Alliance Research
19 Initiating Coverage | UMW Holdings | 18 June 2013
INVESTMENT RISKS
Increase in raw material prices
Raw material accounts for more The risk of rising raw material price (i.e. steel and aluminium) could exert pressure on profit than 1/3 of cost of sales margins at automotive segment. Raw materials could accounts for more than one third of the cost of sales for the automotive segment.
Fluctuation in currency
The fluctuation of foreign exchange rates, particularly the US dollar (USD) against Malaysia Currency fluctuation will pose Ringgit (MYR) will pose challenge to UMW as most raw materials and imported kits are challenge to UWW purchased in USD. Thus, appreciation of USD can have a substantial impact on the group’s margin.
Figure 31 : Malaysian Ringgit (MYR) to 1 US Dollar (USD)
3.80 3.70
3.60 3.50
3.40 3.30
3.20 3.10
3.00 2.90
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-09 Jan-07 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13
Source: Bloomberg
Interest rate hike and credit tightening
Interest rate hike will have a significant impact on the automotive industry as it will adversely Interest rate hike and macro affect buyers’ affordability which will lead to sluggish sales demand. Besides, macro- prudential lending measures will prudential lending measures implemented or to be implemented by Bank Negara Malaysia lead to slowdown in car sales (BNM) such as credit evaluation using net pay, lowering of loan tenure etc would also negatively affect auto sales.
Supply chain disruption risk
Supply chain disruption due to natural catastrophes will have a huge impact on the global Supply chain disruption will have a automotive industry. This can be observed from the Japanese tsunami/earthquake and huge impact on the global flooding in Thailand in 2011, which have shown just how vulnerable global supply chains automotive industry have become.
Increase in cost of living
Sharp increase in cost of living will Any increase in cost of living due to inflation (higher fuel prices, GST implementation, subsidy adversely affect demand for new rationalisation) will lower the disposable income of potential car buyers. This will affect the cars demand for new vehicles.
20 Initiating Coverage | UMW Holdings | 18 June 2013
Sharp decline in crude oil prices and delay of contract awarded
Sharp fall in crude oil price may A sudden sharp decline in crude oil prices may contribute to the scaling back of capex lead in scaling back of O&G capex spending and slowdown of contract award in the oil & gas industry. This would definitely exert some downside risk to earnings as the fixed cost (i.e. depreciation charge) will continue to weigh on margins.
VALUATION AND RECOMMENDATION
Significantly outperformed FBMKLCI over the last 12 months
UMW has significantly As illustrated by Figure 33, UMW has significantly outperformed the FBMKLCI over the last outperformed the FBMKLCI over 12 months. Its share price has appreciated by almost 85% since June 2012, indicating strong last 12 months buying interest. We believe the strong performance was mainly due to the better financial performance, turnaround in the oil & gas segment and the potential listing of this division. Nonetheless, we believe further share price appreciation is now limited.
Figure 32 : Relative performances of local automotive players vs. FBMKLCI (1 June 2012 – 17 June 2013)
80%
UMW 70%
60%
50%
40% Tan Chong
30%
20%
10% DRB
0% FBM KLCI
-10% Jul-12 Jan-13 Jun-12 Jun-12 Oct-12 Apr-13 Sep-12 Feb-13 Dec-12 Aug-12 Nov-12 Mar-13 May-13 May-13
Source: Bloomberg, Alliance Research
21 Initiating Coverage | UMW Holdings | 18 June 2013
Initiate coverage with NEUTRAL call
We believe that most of the positives have already been priced-in given UMW’s rich Most of the positives have already valuation. UMW is currently trading at CY13 and CY14 P/E of 16x and 14x, respectively which been priced-in given its rich are at a premium to its local peer average of 11x-13x and regional peers average of 8x-14x. valuation When compared to its historical P/E valuation, UMW is now trading at almost 2 standard deviations above its mean P/E of 12x.
While we are positive on the long-term fundamentals of UMW, we believe tougher near term competition in the auto sector, especially in mid-to-high-end sedan segment, may negatively affect UMW and offset gains to be made in other segments.
We use a sum-of-parts valuation methodology to value UMW’s diverse investments and businesses. Our valuation method yields a target price of RM13.60 per share (refer to Figure 34). This translates into a FY13 and FY14 P/E of 14.5x and 13.1x, respectively. The TP of Initiate coverage with NEUTRAL call RM13.60 implies a potential downside of -2.9% (after taking into consideration the dividend and TP of RM13.60 yield of 3.9%). With that, we rate UMW as NEUTRAL.
Figure 33 : Target price based on DCF based on FY14 estimates
Segments Net profit P/E Equity Value (RM m) (x) (RM m)
Automotive 857.8 12 10,293.5
Equipment 143.0 10 1,429.9 Oil and Gas 203.1 20 4,061.5 Manufacturing & Engineering 1.2 10 12.4 Others 8.7 9 78.5 Total Equity Value (RM m) 15,876 Number of shares (m) 1,168
Target Price (RM) 13.60
Source: Alliance Research
22 Initiating Coverage | UMW Holdings | 18 June 2013
Appendix I
Figure 34 : Domestic automotive duty structure for CBU and CKD ASEAN (CEPT) Non ASEAN (MFN) Type/Engine CBU Vehicles CKD Component CBU Vehicles CKD Component Capacity (cc) Effect. 23.3.2006 Effect. 1.1.2007 Effect. 23.3.2006 Effect. 1.1.2007 Effect. 23.3.2006 Effect. 1.1.2007 Effect. 23.3.2006 Effect. 1.1.2007 ID ED ST ID ED ST ID ED ST ID ED ST ID ED ST ID ED ST ID ED ST ID ED ST Passenger Vehicles < 1800 5% 75% 10% 5% 75% 10% 0% 75% 10% 0% 75% 10% 30% 75% 10% 30% 75% 10% 10% 75% 10% 10% 75% 10% ≥ 1800 - < 2000 5% 80% 10% 5% 80% 10% 0% 80% 10% 0% 80% 10% 30% 80% 10% 30% 80% 10% 10% 80% 10% 10% 80% 10% ≥ 2000 - < 2500 5% 90% 10% 5% 90% 10% 0% 90% 10% 0% 90% 10% 30% 90% 10% 30% 90% 10% 10% 90% 10% 10% 90% 10% ≥ 2500 - ≤ 3000 5% 105% 10% 5% 105% 10% 0% 105% 10% 0% 105% 10% 30% 105% 10% 30% 105% 10% 10% 105% 10% 10% 105% 10% > 3000 5% 125% 10% 5% 105% 10% 0% 125% 10% 0% 105% 10% 30% 125% 10% 30% 105% 10% 10% 125% 10% 10% 105% 10% MPV/Vans
≤ 1500 5% 60% 10% 5% 60% 10% 0% 60% 10% 0% 60% 10% 30% 60% 10% 30% 60% 10% 0% 60% 10% 0% 60% 10% > 1500 - < 1800 5% 65% 10% 5% 65% 10% 0% 65% 10% 0% 65% 10% 30% 65% 10% 30% 65% 10% 10% 65% 10% 10% 65% 10% ≥ 1800 - < 2000 5% 75% 10% 5% 75% 10% 0% 75% 10% 0% 75% 10% 30% 75% 10% 30% 75% 10% 10% 75% 10% 10% 75% 10% ≥ 2000 - < 2500 5% 90% 10% 5% 90% 10% 0% 90% 10% 0% 90% 10% 30% 90% 10% 30% 90% 10% 10% 90% 10% 10% 90% 10% ≥ 2500 - ≤ 3000 5% 105% 10% 5% 105% 10% 0% 105% 10% 0% 105% 10% 30% 105% 10% 30% 105% 10% 10% 105% 10% 10% 105% 10% > 3000 5% 125% 10% 5% 105% 10% 0% 125% 10% 0% 105% 10% 30% 125% 10% 30% 105% 10% 10% 125% 10% 10% 105% 10% 4WD
< 1800 5% 65% 10% 5% 65% 10% 0% 65% 10% 0% 65% 10% 30% 65% 10% 30% 65% 10% 10% 65% 10% 10% 65% 10% ≥ 1800 - < 2000 5% 75% 10% 5% 75% 10% 0% 75% 10% 0% 75% 10% 30% 75% 10% 30% 75% 10% 10% 75% 10% 10% 75% 10% ≥ 2000 - < 2500 5% 90% 10% 5% 90% 10% 0% 90% 10% 0% 90% 10% 30% 90% 10% 30% 90% 10% 10% 90% 10% 10% 90% 10% ≥ 2500 - ≤ 3000 5% 105% 10% 5% 105% 10% 0% 105% 10% 0% 105% 10% 30% 105% 10% 30% 105% 10% 10% 105% 10% 10% 105% 10% > 3000 5% 125% 10% 5% 105% 10% 0% 125% 10% 0% 105% 10% 30% 125% 10% 30% 105% 10% 10% 125% 10% 10% 105% 10%
* ID: Import duty, ED: Excise Duties, ST: Sales Tax
Source: MITI
What is a CKD and what is a CBU?
CBU – Completely Built Unit
Completely built unit refers to a car/bike/automobile that is imported from another country as a fully assembled unit. These automobiles do not require an assembly before they can be sold out to the buyers in the target country’s markets.
CKD – Completely Knocked Down
Completely knocked down car / bike /automobile is one which is imported or exported in parts and not as one assembled unit. Such units are first sent to an assembly plant in the target country where all these parts are assembled and one complete car / bike / vehicle is made using the imported components. These kinds of units generate employment in the target country as more machinery and manpower investment is needed to assemble the components to make the vehicle.
23 Initiating Coverage | UMW Holdings | 18 June 2013
Appendix II
National Automotive Policy (NAP) Framework
The policy was formed on 19 October 2005 by the Prime Minister’s Department.
Objectives
The policy is formed on the basis of the following 5 major objectives:
To promote a competitive and viable automotive sector, in particular national car manufacturers. To become a regional hub for manufacturing, assembly and distribution for automotive vehicles. To enhance value added and local capabilities in the automotive sector. To promote export-oriented Malaysian manufacturers as well as component and parts vendors. To promote competitive and broad-based Bumiputera participation in vehicle manufacturing, distribution and importation as well as in component and parts manufacturing.
NAP 2006 Highlights
Local assembly of luxury passenger above 1,800cc and priced above RM150,000 on-the- road fully liberalised. Foreigners can own 100% of assembly operations. APs to be stopped by Dec 2015. Audit on AP recipients on-going and checks to be done. Those flouting rules will be removed from list. Gradual introduction of Vehicle End of Life Policy. For starters, vehicles above 15 years will have to undergo mandatory inspection during renewal of road tax. Import Duty structure maintained at 0% for CKD and 5% for CBU for AFTA. Excise duty structure remains. No changes. All imported used vehicles prices will be gazetted to prevent under-declaration. Manufacturing of critical components for cars such as brake system and transmission to get tax incentives such as Pioneer Status/Investment Tax Allowance. The import of used parts/components will be prohibited from June 2011. Proton to establish strategic partnership with a global OEM. The current policy on the freeze of manufacturing licence for reconditioning and reassembling (rebuilt) activities is maintained.
NAP Review 2009 Highlights
Objectives from NAP 2006 were maintained but the following factors became the main focus of the review:
Bring in more sophisticated latest technology into the domestic auto industry Draw up competitive safety standards and environmental-friendly opportunities Enhance implementation of the NAP plans
The following are the highlights of the review:
All duties and taxes on CKD and CBU vehicles remain unchanged. Franchise AP system to be terminated by 31 Dec 31 2020. Open AP system to be terminated by 31 Dec 2015. RM 10,000 will be collected for each Open AP, starting 1 Jan 2010. AP holders will be audited twice a year. The Customs will maintain an official price list for used CBU vehicles to prevent under- declaration of the prices of parallel imported vehicles.
24 Initiating Coverage | UMW Holdings | 18 June 2013
Import of used vehicles will not be allowed after 2015. Import of used automotive parts to be banned from June 2011. Incentives will be provided to encourage the development of local automotive parts. Mandatory annual comprehensive inspection for vehicles aged 15 years or more before road tax renewal. A detailed plan will be introduced further down the road to scrap old vehicles; vintage vehicles will be exempted. Proton to form a strategic partnership with an established Original Equipment Manufacturer (OEM). Manufacturing Licence (ML) can now be issued for selected vehicle types such as luxury vehicles, hybrid and electric vehicles, trucks and commercial vehicles. No equity condition will be imposed in return for the ML. Incentives, in the form of tax breaks, duties exemption and grants, will be offered to local assemblers and manufacturers of hybrid and electric vehicles.
25 Initiating Coverage | UMW Holdings | 18 June 2013
Appendix III
Figure 35 : Toyota car models
Cars Toyota 86 Camry Corolla Altis Vios
MPVs Avanza Innova
SUVs & 4WD Rush Fortuner Hilux
Hybrid PRIUS c PRIUS
Van Hiace
Source: Toyota Website
Figure 36 : Perodua car models
Cars MPV Myvi Viva Alza
Source: Perodua Website
26 Initiating Coverage | UMW Holdings | 18 June 2013
UMW Holdings Berhad Financial Summary Price Date: 17 June 2013
Balance Sheet Income Statement FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F
PPE 3,077.2 3,195.6 3,862.4 4,268.3 4,657.7 Revenue 13,535.8 15,863.6 16,372.2 17,269.2 18,066.6 Intangibles 199.4 167.1 204.6 119.8 26.2 EBITDA 1,905.4 2,102.8 2,288.6 2,473.1 2,608.7 Associates 1,424.4 1,565.2 1,565.2 1,565.2 1,565.2 Depreciation & amortisation (297.6) (285.5) (310.6) (345.0) (374.7) Inventories 1,518.9 1,396.1 1,518.9 1,834.5 1,869.2 EBIT 1,607.8 1,817.4 1,978.0 2,128.1 2,234.0 Receivables 1,209.7 1,109.2 1,209.7 1,568.4 1,618.7 Net interest expense (12.6) (24.4) (25.4) (29.0) (22.5) Other assets 891.9 2,164.2 1,911.9 1,418.3 1,812.6 Share of associates 120.9 164.4 190.7 231.0 279.4 Cash and bank balances 2,219.4 2,195.1 2,219.4 2,495.3 2,405.8 Pretax profit 1,381.5 2,009.7 2,143.3 2,330.1 2,490.9 Total Assets 10,541.0 11,792.4 12,492.1 13,269.8 13,955.3 Taxation (412.0) (431.6) (452.5) (492.1) (526.1) Minority interest (467.5) (583.8) (593.1) (624.1) (658.0) LT borrowings 1,743.3 1,858.2 1,743.3 1,726.4 1,743.6 Net profit 502.1 994.3 1,097.7 1,213.8 1,306.8 ST borrowings 850.7 825.2 850.7 1,155.0 1,166.5 Core net profit 836.7 941.9 1,097.7 1,213.8 1,306.8 Payables 1,924.3 1,610.3 1,924.3 2,184.9 2,226.3 Other liabilities 444.6 1,221.1 1,124.7 727.7 671.9 Key Statistics & Ratios Liabilities 4,962.9 5,514.8 5,643.0 5,794.1 5,808.4 FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F
Share capital 584.1 584.1 584.1 584.1 584.1 Growth Reserves 3,665.0 4,266.6 4,719.1 5,219.5 5,758.2 Revenue 5.6% 17.2% 3.2% 5.5% 4.6% Shareholders' equity 4,249.2 4,850.8 5,303.3 5,803.7 6,342.4 EBITDA 23.7% 10.4% 8.8% 8.1% 5.5% Minority interest 1,328.9 1,426.8 1,545.8 1,672.1 1,804.6 Pretax profit 4.0% 45.5% 6.6% 8.7% 6.9% Total Equity 5,578.1 6,277.6 6,849.1 7,475.7 8,147.0 Net profit -4.7% 98.0% 10.4% 10.6% 7.7% Core EPS 42.1% 12.4% 16.5% 10.6% 7.7% Total Equity and Liabilities 10,541.0 11,792.4 12,492.1 13,269.8 13,955.3 Profitability Cash Flow Statement EBITDA margin 14.1% 13.3% 14.0% 14.3% 14.4% FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F Net profit margin 3.7% 6.3% 6.7% 7.0% 7.2% Effective tax rate 29.8% 21.5% 21.1% 21.1% 21.1% Pretax profit 1,365.3 2,009.7 2,162.8 2,349.4 2,506.7 Return on assets 4.8% 8.4% 8.8% 9.1% 9.4% Depreciation & amortisation 297.6 285.5 310.6 345.0 374.7 Return on equity 11.8% 20.5% 20.7% 20.9% 20.6% Change in working capital (68.8) (388.2) (40.5) (55.3) (49.2) Net interest received / (paid) (88.6) (101.4) (112.6) (113.7) (114.9) Leverage Tax paid (445.5) (424.1) (466.9) (495.7) (536.4) Total debt / total assets 0.25 0.23 0.21 0.22 0.21 Others 247.9 (190.6) (23.4) 72.4 81.6 Total debt / equity 0.61 0.55 0.49 0.50 0.46 Operating Cash Flow 1,307.8 1,190.9 1,829.9 2,102.1 2,262.5 Net gearing 0.09 0.10 0.07 0.07 0.08
Ca pex (673.7) (586.6) (1,000.0) (800.0) (800.0) Key Drivers Others 155.4 158.6 169.6 166.7 174.4 FY 31 Dec 2011A 2012A 2013F 2014F 2015F Investing Cash Flow (518.4) (428.0) (830.4) (633.3) (625.6) Toyota & Lexus 88,662 106,622 106,000 109,180 111,364 Growth -3.6% 20.3% -0.6% 3.0% 2.0% Issuance of shares 81.9 11.9 - - - GDP growth 5.1% 5.6% 5.5% 5.7% 5.7% Changes in borrowings (141.5) 381.9 41.9 40.5 (134.0) Dividend paid (733.4) (863.9) (1,148.9) (1,251.0) (1,290.6) Valuation Others - - - - - FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F Financing Cash Flow (793.0) (470.1) (1,106.9) (1,210.5) (1,424.7) EPS (sen) 43.0 85.1 94.0 103.9 111.9 Net cash flow (3.6) 292.8 (107.4) 258.2 212.2 Core FD EPS (Sen) 71.7 80.6 94.0 103.9 111.9 Forex 18.5 (2.8) - - - Core P/E (x) 20.4 18.1 15.5 14.1 13.1 Beginning cash 2,130.8 2,145.6 2,435.6 2,328.1 2,586.4 EV/EBITDA (x) 9.6 8.7 8.1 7.5 7.0 Ending cash 2,145.6 2,435.6 2,328.1 2,586.4 2,798.6 Net DPS (sen) 31.0 50.0 56.4 62.3 67.1 Net dividend yield 2.1 3.4 3.9 4.3 4.6
BVPS (RM) 3.64 4.15 4.54 4.97 5.43 P/BV (x) 4.01 3.52 3.22 2.94 2.69
27 Initiating Coverage | UMW Holdings | 18 June 2013 DISCLOSURE
Stock rating definitions
Strong buy - High conviction buy with expected 12-month total return (including dividends) of 30% or more Buy - Expected 12-month total return of 15% or more Neutral - Expected 12-month total return between -15% and 15% Sell - Expected 12-month total return of -15% or less Trading buy - Expected 3-month total return of 15% or more arising from positive newsflow. However, upside may not be sustainable
Sector rating definitions
Overweight - Industry expected to outperform the market over the next 12 months Neutral - Industry expected to perform in-line with the market over the next 12 months Underweight - Industry expected to underperform the market over the next 12 months
Commonly used abbreviations
Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date
28 Initiating Coverage | UMW Holdings | 18 June 2013 DISCLAIMER
This report has been prepared for information purposes only by Alliance Research Sdn Bhd (Alliance Research), a subsidiary of Alliance Investment Bank Berhad (AIBB). This report is strictly confidential and is meant for circulation to clients of Alliance Research and AIBB only or such persons as may be deemed eligible to receive such research report, information or opinion contained herein. Receipt and review of this report indicate your agreement not to distribute, reproduce or disclose in any other form or medium (whether electronic or otherwise) the contents, views, information or opinions contained herein without the prior written consent of Alliance Research.
This report is based on data and information obtained from various sources believed to be reliable at the time of issuance of this report and any opinion expressed herein is subject to change without prior notice and may differ or be contrary to opinions expressed by Alliance Research’s affiliates and/or related parties. Alliance Research does not make any guarantee, representation or warranty (whether express or implied) as to the accuracy, completeness, reliability or fairness of the data and information obtained from such sources as may be contained in this report. As such, neither Alliance Research nor its affiliates and/or related parties shall be held liable or responsible in any manner whatsoever arising out of or in connection with the reliance and usage of such data and information or third party references as may be made in this report (including, but not limited to any direct, indirect or consequential losses, loss of profits and damages).
The views expressed in this report reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendation(s) or view(s) in this report. Alliance Research prohibits the analyst(s) who prepared this report from receiving any compensation, incentive or bonus based on specific investment banking transactions or providing a specific recommendation for, or view of, a particular company.
This research report provides general information only and is not to be construed as an offer to sell or a solicitation to buy or sell any securities or other investments or any options, futures, derivatives or other instruments related to such securities or investments. In particular, it is highlighted that this report is not intended for nor does it have regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive this report. Investors are therefore advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situations and particular needs and consult their own professional advisers (including but not limited to financial, legal and tax advisers) regarding the appropriateness of investing in any securities or investments that may be featured in this report.
Alliance Research, its directors, representatives and employees or any of its affiliates or its related parties may, from time to time, have an interest in the securities mentioned in this report. Alliance Research, its affiliates and/or its related persons may do and/or seek to do business with the company(ies) covered in this report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell or buy such securities from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report.
AIBB (which carries on, inter alia, corporate finance activities) and its activities are separate from Alliance Research. AIBB may have no input into company-specific coverage decisions (i.e. whether or not to initiate or terminate coverage of a particular company or securities in reports produced by Alliance Research) and Alliance Research does not take into account investment banking revenues or potential revenues when making company-specific coverage decisions.
In reviewing this report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the overriding issue of confidentiality, available upon request to enable an investor to make their own independent evaluation of the information contained herein.
Published & printed by:
ALLIANCE RESEARCH SDN BHD (290395-D) Level 19, Menara Multi-Purpose Capital Square 8, Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia Tel: +60 (3) 2604 3333 Fax: +60 (3) 2604 3921 Bernard Ching Email: [email protected] Executive Director / Head of Research
29