KUCHING: Analysts expect a tougher operating environment for UMW Holdings Bhd (UMW) in view of stiffer competition in the auto sector and a challenging regional jack-up rig market.
However, UMW’s dividend yields still remain attractive at four to five per cent in 2015 to 2017 estimate and analysts believe the group might limit its share-price downside.
Affin Hwang Investment Bank Bhd’s research arm (Affin Research) in a report, said whilst it believed that the group’s automotive division will continue to be the its mainstay, it remains cautious on the outlook for the division given the lack of new B-segment model launches to contend with aggressive competition from Honda and Mazda.
“So far, UMW has launched its first ever locally assembled D-segment Camry and Camry Hybrid model in the second quarter of 2015 or 2Q15 (Camry accounted for six per cent of Toyota sales in 2014).
“Thus, management is expecting both Toyota and Lexus to sell a combined total of 90,000 units for 2015 (minus 13 per cent year-on-year or y-o-y).
“We are, however, taking a more cautious stance and trim our sales unit assumptions for both Toyota and Lexus as follows: 2015E – to 88,000 from 98,000; 2016E – to 93,000 from 105,000; and 2017E – to 98,000 from 108,000,” it explained.
The research arm also highlight that the strengthening US dollar versus the ringgit and stiffer competition could crimp margins for the auto division.
“Even though 38 per cent-owned Perodua is experiencing strong demand for both its bread-and-butter Axia and Myvi models, we opine that this is insufficient to alleviate margin compression given Perodua’s single-digit profit before tax (PBT) margin (versus Toyota with 12 to 13 per cent PBT margin),” it opined.
Aside from stiffer competition in the automotive department, Affin Research pointed out, in view of the challenging regional jack-up rig market, UMW’s 55 per cent-equity owned UMW Oil & Gas (UMWOG) is expected to face a tough time due to the overall global oil price slump.
“We believe that the uncertainties in global oil prices and falling daily charter rates (DCRs) will pressure UMWOG’s earnings in 2015.
“In addition, UMWOG should face headwinds of lower utilisation rates as four of its jack-up rigs complete their contracts by end-2015.
“Nonetheless, we are hopeful that UMWOG can secure new contracts (albeit at lower rates) to keep utilisation rates afloat, given its younger fleet and reliable track record,” it added.
Overall, the research team retained its cautious stance on UMW’s near- to mid-term margin compression for the auto and O&G divisions, in view of the former’s stiffer competition in the mid- to high-end sedan car segment and the latter’s risk of securing contracts at lower charter rates.
“These may adversely affect the group and offset the higher contributions from other divisions. We also understand that management is, nevertheless, looking out for value-enhancing acquisitions and has implied that it will most probably expand one of its current four divisions (automotive, equipment, O&G or M&E).
“We expect this to be announced accordingly in due course,” it added.
The research team also noted that UMW’s 2015-17E dividend yields of four to five per cent (based on a 70 per cent payout ratio) look attractive, however, and it expected them to limit downside. Hence, it maintained its ‘hold’ rating.
Meanwhile, on UMWOG’s drilling academy, UMW-INSTEP (UIDA), a collaboration between UMWOG and Institut Teknologi Petroleum Petronas (INSTEP), TA Securities Holdings Bhd’s research arm (TA Securities) noted that future contributions from the academy would likely be insignificant to the group.
“We believe the main agenda for the set-up of this academy is to train UMWOG’s internal drilling staff, particularly local talent.
“In addition, it also enables UMWOG to assist Petronas in achieving its aspirations of turning INSTEP into a regional learning and certification hub for O&G,” it said.
The research team also noted that UMWOG has invested approximately RM20 million of capital expenditure to set-up UIDA, with the majority of costs mainly centered on the land rig.
“UMWOG pays rental to INSTEP for use of its land and facilities. Given that UIDA was only recently set up in March 2014, this academy is yet to turn a profit,” it added.