Asia forecasts UML net profit to rise 79% to Rs. 1.6 b in FY12

Asia Wealth Management is forecasting United Motors Lanka Plc (UML) to achieve a net profit of Rs. 1.6 billion in the 2012 financial year up by 79% over the previous year. This assessment along with its attractive pricing is contained in an interim report on UML by Asia Wealth Management. Here are excerpts:

Company overview

United Motors Lanka (UML) is the sole distributor of brand new Mitsubishi Vehicles and spare parts in Sri Lanka whilst offering a variety of vehicles ranging from mid range cars to up market Sports Utility Vehicles (SUVs), trucks, buses, etc.

UML has cemented its position as the market leader in the Brand new Japanese vehicle market, with market leadership status in trucks (market share of 64%), SUV’s (46%), vans (50%) and buses.  Meanwhile UML accounts to circa 36% to the total Japanese brand new vehicle imports to the country in 2010. The company also engages in the sale of motorcycles through its joint venture TVS Lanka, whilst currently commanding a market share of circa 16% of the local motorcycle market. In addition to its core activities UML also sells lubricants (Valvoline brand), tires, and is a provider of after sales services and vehicle hiring operations, etc.

Financial performance

UML depicted impressive results during 1QFY12, which was primarily on the back of strong demand prevailed in the domestic automotive industry. Revenue has surged by staggering 145% to record Rs. 3.7 b in relative to Rs. 1.5 b achieved in corresponding previous year. The domestic automotive industry witnessed strong upside after the significant tax revision took place in mid 2010. Overall vehicle import taxes were brought down by 50%, which ended up the stagnant nature of the domestic motor industry. Cost of sales of the group in 1QFY12 increased by 159% during the period under consideration which is aligned with the improved sales volumes and other core expenses of the group. Operating profit portrays an impressive 224% outgrowth during the period under review which was mainly on account of reduction in administrative and other expenses coupled with well managed distribution expenses in the group.

UML was able to bring down its long term as well as short term interest bearing borrowings from Rs. 183.4 m to Rs. 0.9 m and Rs. 1.33 b to Rs. 74 m respectively. The substantial diminution in interest bearing borrowings have led the finance cost to reduce significantly Rs. 74 m to Rs. 8.9 m, which has resulted in net earnings to improve by an impressive 576% to reach Rs. 410.5 m compared to Rs. 61.4 m in corresponding previous period.

Valuation

We forecast the FY12E net profit to increase 79% YoY to Rs. 1,616.6 m. Whilst we believe stable growth will be maintained in ancillary services including lubricants, tire sales, hiring, and leasing services, future earnings are expected to be spearheaded by consistent growth in the sale of brand new vehicles (particularly cars and trucks) and motorcycles. UML is fairly attractive on PE multiples of 6.4X based on forecasted FY12E net profit. Meanwhile, the counter is currently trading on a PE multiples of 8.2X in comparison to Motor sector (8.1X) and peers, Lanka Ashok (15.2X), Sathosa Motors (13.2X), Colonial Motors (14.8X) and DIMO(4.5X). Further with a BVPS of LKR59.2 in FY11, UML is trading at a discount to its net asset value with PBV of 2.6X and with the improved forecasted earnings we expect the PBV to improve to 1.9X in FY12E.

(Sine we expect some revision of vehicle import taxes in the upcoming budget, we refrain from projecting FY13E and beyond performance of the counter.)