UMW Holdings Bhd - 2011

MARC affirmed its short-term and long-term Islamic debt ratings of MARC-1ID/AAAID on UMW Holdings Berhad (UMW) and maintained its stable outlook on the ratings. The rating actions affect RM610 million of outstanding notes issued under the investment holding company's RM300 million Islamic Commercial Paper/Islamic Medium Term Notes (ICP/IMTN) Programme and RM500 million Islamic Medium Term Notes (IMTN) Programme.

The affirmed ratings reflect improvement in the government-linked company's consolidated operating performance and the strong business positions of 51%-owned subsidiary UMW Toyota Motor Sdn Bhd and 38%-owned associate Perusahaan Otomobil Kedua Sdn Bhd in the domestic automotive market. Its substantial ownership by government-led investment agencies, in particular Skim Amanah Saham Bumiputera, Employees Provident Fund Board and Permodalan Nasional Bhd, continues to be an important rating consideration. These factors are partially offset by cyclical variations in the domestic automotive sector, the weak results of its oil and gas (O&G) segment and the risks associated with possibly more acquisitions in the future and the group's international expansion in a highly competitive business environment.

UMW's portfolio of businesses includes automobile assembly and manufacturing, equipment, manufacturing and engineering (M&E), and O&G with operations in 13 countries largely within the Asia Pacific region. Of the four core segments, its automotive segment has historically provided the majority of revenue and earnings. The automotive segment accounted for 77.5% of consolidated revenue and nearly all of consolidated pre-tax profit in 2010. MARC notes the continuing market leading positions of its Toyota and Perodua marques in the non-national and national market segments, which collectively accounted for 46.3% of the total industry sales volume for the previous two consecutive years. The automotive segment encountered parts shortages from the March 2011 earthquake and tsunami in Japan; however, production has returned to normal since May 26, 2011 and the impact of the supply chain disruption on sales should be moderated by the launch of the new MYVI on June 16, 2011 and planned ramp-up in production for the remaining months of the year.

UMW's financial results for the year ended December 31, 2010 were generally in line with the rating agency’s expectations. Group revenue grew by 19.6% while pre-tax profit rose 55.1% year-over-year compared  to declines of 16.0% and 33.7% respectively in 2009. Overall, the group's results had benefited from foreign currency movements and improved trading conditions. With the exception of O&G, UMW's portfolios of businesses were profitable in 2010 and two of four segments, automotive and M&E, posted higher operating margins. O&G incurred a segment pre-tax loss of RM180.4 million for the year, including a RM63.7 million share of losses of equity-accounted investments. Results of the O&G business in 2010 were constrained by challenging industry conditions in addition to trade protection measures introduced by the United States. However, improvement in this segment is possible in 2011 with an expected turnaround in the consolidated operating performance of its O&G subsidiaries and improved equity-accounted results of WSP Holdings Limited (WSP). The 22.3%-owned WSP manufactures pipes and other tubular products used in O&G exploration and production (E&P). In addition to full year revenue contributions from its Naga 2 offshore rig, the E&P subsegment will also see contributions from Naga 3 which was commissioned in March 2011.

At holding company level, revenue and pre-tax profit showed increases of 49.0% and 63.4% year-on-year, primarily the result of higher dividends received. Dividends received during the year of RM373.3 million was more than sufficient to cover interest payments of RM16.4 million and dividends to shareholders of RM273.6 million. MARC notes a slight increase in the holding company’s leverage, measured at 0.47 times (x) debt/shareholders' funds from 0.43x a year earlier. Holding company liquidity has been bolstered by a decrease in amounts due from subsidiaries and higher dividends received; UMW held cash and cash equivalents of RM237.7 million as at end-2010 (end-2009: RM5.4 million).

The stable outlook reflects an improved operating environment for most of the group's businesses, and expected recovery in its O&G segment. It also assumes that holding company liquidity and cash flow metrics will remain supportive of the assigned ratings. A material deterioration in UMW's consolidated financial performance, adverse developments in relation to any of its significant investments, a significant increase in its financial leverage or tightening of its liquidity could exert pressure on the ratings.

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