Saturday September 24, 2005

UMW oil & gas division turns profitable

UMW Holdings Bhd recently had an analyst briefing to shed some light on its oil and gas operations. AMRESEARCH has the report

IN the first half of FY05, UMW Holdings Bhd's oil and gas division turned profitable with the main contribution coming from Wuxi Seamless. Going forward, we believe UMW's oil and gas division will contribute positively to the group's bottomline. However, its automotive business will continue to be its bread and butter in the medium term.

Upstream activities

UMW’s oil and gas business is focused on the upstream activities, which are exploration and production. The division is divided into four different segments – (1) tabular unit, (2) operations and maintenance unit, (3) offshore and drilling unit, and (4) international trading unit.

Tubular Unit

UMW’s oil and gas unit is the premier supplier of tubular products and provider of a host of services to support the oil and gas upstream industry. Under this division, its subsidiaries supply pipes and oil country tubular goods (OCTG) related products, provide threading and coating services and render various operations and maintenance services. Below are the companies under this unit:

·Wuxi Seamless Oil Pipe Co Ltd manufacturers and trades hot rolling seamless steel, including tubings, casings, drill pipes, line pipes, boiler tubes, tubes for structure, conveyance fluid, platform rigs and petrochemical plants. UMW owns Wuxi Seamless through its 51% subsidiary UMW ACE (L) Ltd. UMW ACE (L) Ltd has a 51% equity interest in Wuxi Seamless. Thus, UMW’s effective stake in Wuxi is about 25%.

Wuxi is currently one of the top three OCTG suppliers in China. At present, it has a capacity of 220,000 tonnes p.a. and is operating at near full capacity. Plans are in the pipeline to raised capacity to 450,000 tonnes p.a. The expansion plan is expected to be completed by 3Q06.

·UMW Citra Maju (UCM) is Malaysia’s first integrated premium treading plant and machine repair shop. It has a production capacity of 60,000 tonnes p.a. UCM has a subsidiary which has operations in Songkla and Sattahip in Thailand. UMW has a 51% stake in UCM.

l UMW holds 40% equity interest in Shanghai Tube-Cote Petroleum Pipe Coating Co Ltd (STPPC), a Chinese-foreign joint venture (JV) enterprise. STPPC undertakes the internal coating and trading of drill pipes, tubings, casings and other related products. It started operations in September 2004 and is situated in the Yuepu Industrial Zone, Boashan District. Currently, STPPC has more than 60% share of the domestic market.

·Jiangsu Tube-Cote Shuguang Coating Co Ltd (JTSC) is another Chinese foreign JV enterprise that UMW has 20% interest in. JTSC’s activities include internal coating and trading of pipes. The plant, which started operations in February 2004, is located in Jiangyan City of the Jiangsu province. JTSC obtained ISO1991:2000 certification in May 2004.

·Shanghai BSW Petro-pipe Co Ltd. (BSW) is a JV between Baoji Petroleum Steel pipe Co Ltd and UMW. Boaji Petroleum is a company in the China National Petroleum Corp group. BSW produces the spiral submerged welded pipe. Its plant is able to produce up to 150,000 tonnes p.a. BSW is one of the suppliers to China’s first west-east gas pipeline project.

·UMW Oilfield Services (Tianjin) Co Ltd (UMW Tianjin) has premium threading licences from JFE Steel Tabular technology and Tenaris 3SB from Tenaris Connections. This company is positioned to be a one-stop-shop OCTG service provider in China and to foreign companies based in China.

Operations and Maintenance Unit

Under this division, UMW expanded its operations through UMW SAEKAPHEN. This company is a wholly-owned subsidiary of UMW. UMW SAEKAPHEN is an exclusive licence holder in the local and Asean markets for SAEKAPHEN coating technologies developed by SAEKAPHEN GmbH of Germany. This company is the provider of high-end technology for coating applications to tube-side and shell-side heat exchangers, condensers and air-coolers. The SAEKAPHEN trademark is well-known in the petrochemical, chemical, refinery and fertiliser industries. The coating plant is located at Teluk Kalong, Kemaman.

Offshore and Drilling Unit

The offshore and drilling unit offers drilling, workover and petroleum engineering consultancy service. Services include offshore drilling rigs and offshore and onshore workover services.

UMW Petrodrill is a Petronas-licensed service contractor that offers a range of drilling and workover-related services. The company also offers technical support services for an array of drilling activities-related equipment and material manufactured and marketed by Dril-Quip Inc, Maxtube Ltd and UWG Ltd. The company’s hydraulic workover units were engaged in the Pulai and Resak Platforms and in the Vietsopetro well programme in Vietnam.

International Trading Unit

UMW Oilfield International Trading (UOIT) and UMW Oilfield International trading (Labuan) Ltd [UOIT(L)] are both wholly-owned subsidiaries of UMW. Main activities are marketing, importation and distribution of oilfield equipment for the oil and gas industry, as well as the provision of related technical support services. Operations started in January 2005.

Financial Impact: Wuxi main contributor

In 1H05, UMW’s oil and gas division provided 10% of turnover and contributed about 20% of pre-tax profit. This division’s margin is about circa 10.5%. Wuxi Seamless contributed the biggest chunk (50%) to the earnings.

Apart from UMW Tianjin, all of the group’s oil and gas companies are profitable. Management is hopeful that the Tianjin operation would be in black by this year. We are maintaining our projections of RM95mil contribution to pre-tax profit (20%) for FY05 (FY04: RM3.6mil loss).

In terms of order book, management indicated that it is sufficient up till next year. We believe going forward, its oil & gas division would contribute positively to its bottomline. This is supported by its Wuxi plant expansion, which is expected to be completed in 3Q06. Thus, contribution thereafter is expected to be bigger. We have factored in 25% turnover growth for FY07.

Automotive Division

Between January and July 2005, UMW has already sold 47,380 units of vehicles. The recently launched Fortuner already has bookings of 1,400 units with a 3-4 months waiting period. Although volume is not as big as the Innova, due to its expensive price tag (RM180k –RM200k), we believe the Fortuner would support Toyota’s automotive margins. Currently, the automotive pre-tax margin hovers at an average of 5%.

Models line-up for 2006: After unveiling three completely knocked down (CKD) models this year, we understand management would focus on bringing in completely built up (CBU) models next year. Among the rumoured models to be imported next year are the Toyota Vitz, Toyota Wish and Toyota Harrier.

No plans for plant expansion: Management indicates there is no plan to expand its plant capacity. Capacity expansion would only be at the Perodua side. Thus, after the Avanza, we could expect more Toyota models to be assembled there. Another option would be to have big volume models assembled in Thailand and exported here while the higher-end models with lower volume may be assembled in Malaysia.

Toyota’s plant in Thailand has a capacity of 280k units p.a, which is almost 4x bigger than the capacity of Toyota’s plant in Malaysia.

Given Toyota’s to-date sales volume of 47,380 units, which is 67% of our forecast for the full year, we have raised our sales volume assumptions from 70,761 units to 78,500 units for FY05. However, given the CBUs line-up for 2006, which are not expected to register as strong volume sales as CKDs, we expect sales would soften in FY06 and FY07. For FY06 and FY07, we have a projected sales volume of 72k units and 74k units respectively. No change in Perodua sales volume assumptions.

We are maintaining our dividend quantum of 23 sen for FY05 or 50% payout ratio. This translates to a yield of 4.3%.

Reiterate buy: We are maintaining our target price of RM6.05 based on 12.6x its CY06 EPS. With a dividend yield of 4.3%, the stock has total return of 16.3%. Reiterate Buy on UMW.

UMW : [Stock Watch] [News]
UMW-WA : [Stock Watch]

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