United Motors’ FY11 earnings forecast raised to Rs. 725 m from Rs. 641 m

John Keells Stock Brokers (JKSB) has raised the earnings forecast of United Motors Lanka Plc (UML) to Rs. 725 million in the financial year 2010/11 from the earlier estimate of Rs. 641 million. This upgrade is following the release of third quarter results by UML last week. Following are excerpts from JKSB earnings update on UML:

3Q performance

UML registered a tenfold earnings growth for the 3QFY11 compared with the comparative quarter last year to reach Rs.559m for the nine months. This is mainly on the back of realising vehicle sales from prior bookings and increased demand

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for three wheelers and Perodua cars.

The company recorded a 70% YoY growth in cumulative revenue with revenue generated during 3Q almost doubling compared to that of last year’s comparative period, especially due to the strong performance posted in the Mitsubishi vehicles segment, which contributed over 40% of UML’s revenue.

The new vehicles segment reported a cumulative revenue growth of 1.2 times over that of the last year’s figure. Operating profit margin increased to 11.7% during the nine months from 5.1% achieved during the comparative period last year due to accelerated sales volumes of high margin vehicles. The company witnessed a strong pick up in vehicle sales during 3Q with the company selling over 1000 units (excluding motor cycles and three wheelers) where Perodua cars accounted for a majority. Demand for three wheelers remained strong with the volumes doubling during the quarter compared to 2QFY11.

The spare parts segment witnessed an 18% growth in revenue as a result of the expansion of dealer network totalling to 350 dealers with 150 dealers appointed for Mitsubishi, JMC, Perodua and Zotye Nomad vehicles and over 200 dealers for TVS products.

Repairs and services cumulative revenue recorded a growth of 22%YoY over the corresponding period last year and a 12% YoY increase in segmental profits. Approximately 60% of the revenue was driven by Mitsubishi spare parts sales and Mitsubishi vehicle repairs contributed to almost 100% of the repairs and services revenue.

Revenue from lubricants recorded an 8% YoY growth for the first three quarters but its profits declined by 55% YoY. The tyre segment’s profits continued to decline despite a marginal increase in revenue. The finance leasing segment turned profitable during the nine months compared to a loss reported during the comparative period last year on the back of higher demand evident for vehicle leasing amidst lower interest rates.

However, despite the strong revenue growth witnessed, UML’s gross profit margin declined from 27.4% achieved in the last year’s 3Q to 22.6%, mainly due to strengthening JPY against LKR that squeezed the profit margins of the Mitsubishi brand new vehicles segment.  Distribution expenditures approximately doubled during the quarter over that of the last year’s 3Q and the figure accounts for a 21% growth from that of 2QFY11 as a result of higher sales and promotion expenditures on workshop activities.

Other income grew significantly during the quarter due to a realised profit on sale of used vehicles as a result of divesting the hiring business and increased sundry income on the back of higher vehicle and spare parts sales. Finance expenses saw a 55% YoY decline as a result of lower debt levels and lower interest rates. Interest on term deposits mostly contributed to the finance income growth. This in addition to the strong operating results contributed to the PBT margin rising to 16% during the current quarter over a 10% margin achieved in 2QFY11.

Outlook

Demand for Mitsubishi Montero, Lancer and Montero Sport vehicles is expected to pick up from 4QFY11onwards mainly due to the bookings from Government permit holders. We expect the demand for Perodua cars and three wheelers to remain strong for the remaining quarter as well.

Revenue and profitability of spares and repair and maintenance segments are expected to grow given higher vehicle sales. Given the strong performance of 3Q and the future growth prospects, especially in the brand new vehicles segment, we raise our FY11E earnings forecast to Rs.725m from Rs.641m. This will correspond to an EPS of Rs.10.78 per share and a P/E multiple of 17.3x at a market price of Rs.186.10.