UBS Not Out of Woods Yet, But Recent Actions Help; Maintain Buy

5/6 - "Bottom Line: q1 loss was as pre-announced. The good news was solid progress in reducing balance sheet exposures (plus new debt vehicle to be managed by BLK that will further reduce RMBS exposures by ~$15B), improved capital ratios on recent hybrid issuance & upcoming rights offering to a pro forma tier 1 capital ratio of 11.8%, & better than expected cost saves (with more to come as UBS expects to resize their total cost base to CHF ~28B annually back to ‘04 levels & compares to CHF 35B in ‘07 through the a 12% reduction of 2,600 heads in the I-Bank & a 6.5% or 5,500 heads across UBS by mid-09). The bad news was weaker than expected results in I-Banking & Equities, outflows overall (led by asset mgmt) incl. big declines in Int’l Wealth Mgmt flows, & mgmt’s still cautious outlook. While we reduce our numbers on soft top-line results & outflows, offsets include better than expected expense saves & the 7% lift in global equity markets since q1 end."

"U.S. sub-prime exposures are down 43% to $15.6B and Alt-A down 43% to $17.1B; post the BLK structure, total US RMBS exposures will decline another 46% to $17.8B. U.S. CMBS and LBO exposure also fell ~20% or more, while student loan exposure rose."

"Lowering our FY’08 ests. to a loss of $3.40 vs. $2.30 loss previously on lower activity levels at the I-bank & weaker flows across UBS, which is also key to our FY’09 estimates cut from $4.64 to $4.25. Reducing target commensurate with EPS cut, from $46 to $43, 10x our ‘09 EPS forecast...Sum-of-the-parts derived $43 target,
which is 10x our FY'09 estimate."