UMW- may have a bullish breakout

Results Update

UMW announced its results  for QE31/3/2012 yesterday. Its net profit increased by 45% y-o-y to RM220 million on the back of a 15%-increase in revenue to RM3.695 billion.

The improved profitability on q-o-q basis was due to the positive turnaround for two segments- Equipment and Oil & Gas which reported a pre-tax profit of RM54 million & RM30 million respectively as compared to net loss of RM45 million & RM190 million respectively. This was more than offset the decline in pre-tax profit for the Automotive segment which declined from RM480 million to RM371 million.

Net profit increased by more than 3-fold q-o-q due to higher effective tax rates for last calender quarter for the following reasons:

• assets impairment losses not tax-deductible, 
• non-recognition of deferred tax assets for subsidiaries and 
• higher tax rates for overseas subsidiaries.

Table: UMW's last 8 quarterly results


Chart 1: UMW's last 21 quarterly results

Valuation

UMW (currently at RM8.03) is now trading at a PE of 16 times (based on last 4 quarters' EPS of 49 sen). At this multiple, UMW is deemed fully valued.

Technical Outlook

UMW has just broken above its triangle, ABC at RM7.80 yesterday. If we assume the distance of this rally to be equivalent to the distance from point 'B' to the breakout level (of RM3.00), then the target for the rally is RM11.00. That's quite a distance and it can only happen if UMW's financial performance were improved substantially.


Chart 2: UMW's monthly chart as at May 29, 2012 (Source: Tradesignum)

Conclusion

Based on technical breakout, UME could be a trading BUY. As the stock is fully valued, this could be a risky trade. Plese exercise careful discretion if you chose to trade this breakout.