Upgrade to buy at RM6.19 with higher target price of RM6.95: UMW’s 1QFY10 revenue was within house and consensus expectations. However, net profit surprised, coming in at 59% and 45% of FY10 estimates, respectively. The higher revenue was mainly due to stronger vehicle sales of 71,000 units (1QFY09: 56,000 units). Net profit was sharply higher led by margin expansion in the auto division.

UMW recorded strong vehicle sales compared to a very weak 1QFY09 when pessimism on the global economic outlook was at its peak. Economic recovery and improved consumer confidence saw Toyota vehicle sales increasing 4,000 units year-on-year (y-o-y) to 21,000 in 1QFY10, while associate Perodua saw sales gaining 9,000 units y-o-y to 48,000. Overall 1QFY10 combined market share of Toyota and Perodua rose to 47.9% (1QFY09: 47.1%). Meanwhile, revenue and profit after tax and minority interest for equipment and M&E divisions posted higher y-o-y performance as demand recovered and margins improved.

With only semi-submersible rig NAGA 1 making major contributions since 1QFY09, revenue and net profit growth is lacking in the O&G segment. The management attributed the loss mainly due to pre-operating expenses incurred on greenfield investments which will mostly commence production in 2H10. At the associate level, Wuxi’s profitability is still adversely affected by anti-dumping duties, but the management expects a turnaround in 2H10.

UMW is targeting the O&G segment to be profitable by year-end, underpinned by jack-up rig NAGA 2 scheduled to be operational in 3QFY10. Jack-up rig NAGA 3 is slated to be delivered by end 2QFY10. Negotiations with potential clients are said to be in final stages for both jack-up rigs.

As results were above expectation, we have revised our earnings forecasts higher by 58%-68% in FY10-FY12 mainly on the back of higher vehicle sales and better auto margins, while scaling back on profit contributions from the O&G segment. Hence, we upgrade UMW from sell to buy as our target price is raised from RM5.59 to RM6.95.

Barring a double-dip recession, the auto industry is expected to enjoy bumper profits this year as industry vehicle sales look to exceed its previous peak of 548,000 units achieved in 2008. — ECM Libra Investment Research, May 21