Monday, July 30, 2007


UMW, The Undiscovered O&G Play


The principal activities of the Group are import, assembly and marketing of passenger and commercial vehicles and related spares and manufacturing of original/replacement automotive parts; manufacturing and trading of oil pipes and providing various oil and gas services including drilling and pipe-coating. UMW manufactures automotive parts and offers after sales service. The company is also engaged in the manufacturing and trading of a wide range of light and heavy equipment such as LG agricultural equipment, asphalt pavers, Toyota forklifts and others. These are for use in the agricultural, industrial and construction sectors. The company also manufactures and supplies equipment and parts to the oil and gas industry. Through its subsidiary, UMW has about 28% market share in the non-national motor vehicle market. Also through its associate, the company has an overall market share of 28.8% in the national motor vehicle market. UMW's subsidiary is 51% owned UMW Toyota Motor Sdn Bhd. It is engaged in the import and distribution of Toyota vehicles. In addition, Perusahaan Otomobil Kedua Sdn Bhd (PERODUA), a 38% associate of UMW, manufactures, assembles and distributes about 127,478 units of motor vehicles annually. To note, PERODUA is the second national carmaker in Malaysia.


That part, everybody knows, now what most investors are in the dark is their oil & gas forays. In 2006 UMW made a net profit of RM76.5m from o&g division. In 2007, that division should bring in RM118m in net profit. That is expected to reach RM200m in 2008. For 2007, UMW as a whole is expected to post a net profit of RM430m, and RM540m in 2008. Thats 27.4% in 2007 and 37% in 2008. That figure should jump close to 60% of overall net profits in 2009. No matter how you cut it, the oil & gas side is already bubbling over. Compared to even Sapuracrest, the UMW's oil and gas division is already making more net profit than Sapurcrest entire. Thanks to senior management's foresight, they have secured their manufacturing and fabrication side with a low cost platform esp in China and India years back. At that time, oil and gas was not frothing like now in Malaysia.


The growth are its pipe manufacturing ventures in China, namely Wuxi Seamless Pipe, Shanghai BSW and Zhongyou BSS Petropipe. In Malaysia, its tw new jack-up rigs are good money spinners as well. They have made in-roads in Vietnam, and should be a beneficiary of the Sabah-Sarawak pipeline project as well. In India, the contribution is small at the moment but a good presence there. UMW has a significant jv with United Steel Allied Industries Pvt Ltd which should propel he company into India's oil & gas ventures - the iitial investment cost UMW RM66.8m. UMW also have oil & gas ventures in Australia, Thailand and Turkmenistan. All said the company has a very credible and wide platform servicing the oil & gas players.


The attraction of buying and keeping UMW now is very high. I see this being a two-three bagger within 6-12 months. For 2007 the EPS should hover around 85 sen and rising to RM1.05 in 2008 with a good chance of scaling to RM1.40 in 2009. That's very comforting already. PNB cannot ignore the success of oil and gas within UMW esp when it makes up a very significant portion of earnings. They will have to spin it off via a seperate listing which will unlock enormous values for UMW shareholders, and it makes good business sense to do that. At current prices, an aggressive share split and/or bonus would also be in order. Want another IOI Corp or DIGI share price run up ... buy and keep UMW and hold till all the above unfolds. Bearing in mind, their strategy has also shifted to bid for Malaysian oil & gas contracts, upside surprises are aplenty... and this being a PNB controlled company to boot. Probably the top buy and hold company around with so many oil & gas pretenders running havoc. Stick to the real pros with a very solid oil & gas services platform.

5 comments:

sahamgurl said...

I totally agree with you on UMW, btw, do you have any thoughts on Kencana? Thanks!

Mightydopy said...

Dear Salvatore_Dali,
I found your blog by luck, some time ago
and since than follow you.
I like very much the style you choose.
Also I am an international trader,
Dutchman.
Do you know what is the easiest and cheapest way to buy Malaysian stocks,
since I live in Germany?
Yours
mightydopy

puffyeye said...

I agree that UMW has upside in terms of oil play. However, it should be noted that their biggest revenue comes from the auto industry (currently close to 5 times the oil & gas division) and profitability in this area has dropped. In terms of profit, it still make more than oil & gas division thus any adverse result from auto segment will be felt.

Overall, the company's profit margin is only 6% - not fantastic. But since the oil & gas business area's profit margin is 18%, they should do better in future with increasing importance of this segment.

Salvatore_Dali said...

mightydopy,

you can just buy the Barclays ishares Malaysia, which is an ETF like indexed fund ... or some other Malaysia indexed fund ... if you choose to trade direct, it will be expensive but best if you have a private banker who can easily buy any share for you, probably with commission running at 1% or 1.5% per trade ... failing which, if you have a stockbroker who is linked to a global house (e.g. Merrills or Deutsche Bank), you should be able to execute the transactions cheaper.

The Rock said...

Affin forecast that UMW will earn EPS=RM1.12 in FY2008. Both Affin and AmResearch set the same Target Price of RM18.

Am released their report on Monday July 2 revising their TP from RM13.50 to RM18. Interestingly on that very day, UMW spiked up from RM12.60 to RM13.50. Since then it has moved up to a high of 15.40 before hovering around 14.50 - 15.00. What is amazing is that there were some buying of Umw before the release of the report. UMW crept up from RM12 to 12.60 in the last week of June.

Last time, Am revised the TP of Coastal from RM1 + to RM2.10 and it promptly went up from about 1.50 to 2.50 in less than 2 weeks! Than JP Morgan issued a TP of 3.10. Guess where Coastal is now?

So I would bet on the AM's [and JPMorgan if they do cover Umw] TP. It is achievable if the sentiments in KLSE recovered from the sub-prime flu.

You may consider buying UMW-Ca which is trading at almost zero premium since May. Leverage about 3X.

cheers.