MARC has affirmed its short-term and long-term Islamic debt ratings of MARC-1ID/AAAID on UMW Holdings Berhad (UMW) with a stable outlook. The rating actions affect RM800 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 IMTN Programme.

The affirmed ratings and outlook reflect the sustained performance of UMW’s automotive business segment supported by leading market shares of 51%-owned UMW Toyota Motor Sdn Bhd and 38%-owned Perusahaan Otomobil Kedua Sdn Bhd in the domestic non-national and national passenger car segments, the holding company’s substantial recurring dividend income from 51%-owned UMW Toyota Motor Sdn Bhd and expectation of an eventual turnaround at the group’s oil and gas (O&G) business segment. Even amid the pre-tax losses of the manufacturing and engineering (M&E) and the O&G business segments in the financial year ended December 31, 2011 (FY2011), UMW continued to report steady growth in consolidated profit for the year. The ratings also incorporate the good liquidity positions of UMW, the ultimate holding company and UMW Corporation Sdn Bhd, the intermediate holding company of the UMW group, which are supported by sizeable holdings of cash and cash funds.

UMW’s principal business segments are automotive, equipment, M&E and O&G; the group has operations across 13 countries, mainly in the Asia-Pacific region. UMW is a public listed government-linked company in which government-led investment agencies have a substantial shareholding. While the group’s automotive division continues to be the main contributor to group earnings, UMW has growing interests in the upstream segment of the O&G sector consistent with its business strategy of strengthening and diversifying its earnings base over the medium term.

The automotive segment had 2011 sales of RM9.7 billion and segment pre-tax profit of RM1.5 billion while UMW’s consolidated revenue and pre-tax profit came in at RM13.5 billion and RM1.4 billion respectively. Notwithstanding the parts supply disruptions caused by the earthquake in Japan and floods in Thailand in the first and fourth quarters of the year respectively, the automotive segment’s pre-tax profit was 12.3% higher year-on-year, compared to FY2010’s results. The Toyota and Perodua marques maintained their strong market positions, collectively accounting for 44.8% of the total industry sales volume in 2011. The two auto makers sold a total of 268,651 vehicles in 2011. UMW has revised its target sales for FY2012 upwards following the strong vehicle sales in 1HFY2012. Revenue from the automotive segment rose by 18.6% year-on-year to RM5,534 million in 1HFY2012.

The equipment business segment is a distant second in terms of contribution to group profit. Its revenue rose to RM2.1 billion (FY2010: RM1.6 billion) mainly due to high demand for its timber machinery. However, the division’s pre-tax profit declined by 32.1% to RM70.5 million (FY2010: RM103.9 million) due to a RM102 million loss provision for its Papua New Guinea operations. For 1HFY2012, the segment registered a pre-tax profit of RM110.8 million (1HFY2011: RM72.4 million). Meanwhile, lacklustre trading conditions affecting UMW’s M&E segment were reflected in its reduced revenue and RM11.9 million segment pre-tax loss.

While the O&G business segment posted higher revenue on the back of full year contributions from its three offshore drilling rigs, its overall results were negatively affected by challenging industry conditions for its oil country tubular goods (OCTG), line pipe and fabrication sub-segments and impairments of equity investments in listed foreign businesses. The segment posted a larger pre-tax loss of RM230 million in FY2011 (FY2010: -RM180 million) but turned around with a pre-tax profit of RM31.5 million for 1HFY2012. The group intends to rationalise its non-core O&G businesses and improve the business risk profile of the O&G segment by focusing on the offshore drilling sub-segment.

At holding company level, dividends received by UMW during FY2011 of RM393.5 million were more than sufficient to cover interest payments of RM19.5 million. MARC also notes that the intermediate holding company, UMW Corporation Sdn Bhd (UMWC) received dividends of RM587 million in FY2011. Although the holding company has maintained a good liquidity position, its cash flow remains thin because of its high cash dividend policy. For FY2011 dividends to shareholders were RM349.4 million. Nevertheless, UMW has indicated that it will explore options to strengthen its balance sheet through earnings retention. The holding company’s debt leverage has increased from 0.42x as of end-December 2011 to 0.55 times (x) (group: 0.48x).

MARC believes that the financial, business and execution risk associated with the current growth initiatives pursued by the group in the offshore drilling sub-segment of the O&G sector and potential capital investments required could weigh on UMW’s near-to medium-term credit profile. To the extent that any capital outlays could pressure group cash flows and leverage, concrete and credible actions would be required on the part of UMW to address any negative rating pressures on its long-term AAA rating and its ability to maintain consolidated and holding company level credit metrics at levels consistent with current ratings.

Downward rating pressure could develop in the event of significant operational underperformance of one or more of its business segments, a pronounced increase in external debt to cover any capital expenditure or reduced earnings certainty as a result of cyclical changes in demand in respect of its business segments.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.