Investment Highlights

• We maintain our HOLD call but cut our SOP-based FV slightly to RM5.49 (from RM5.54) for UMW with a PE multiple of 10x on its automotive segment.

• FY18 core net profit of RM415.9mil fell below expectations, accounting for 90% of our FY projection and 92% of consensus.

• The 4Q was weaker than expected and it was dragged down mainly by poorer Toyota sales, and commencement of payment to holders of perpetual sukuk (at a rate of 6.35% or RM69.9mil annually).

• Toyota sales slumped 36%YoY to 12.9K units in 4Q in the aftermath of the tax holiday, which it had leaned on heavily.

• Recall that Toyota earned 45% of its sales during the 3- month tax holiday. It has set an aggressive sales target of 14% this year and will rely especially on the Vios and Yaris for volume. Both cars will be produced by the plant in Bukit Raja in Klang, Selangor.

• We retain a target of 8% YoY to 71K units for Toyota, as it will be an uphill battle for it to build and sustain momentum.

• The full-year results were nonetheless impressive on a YoY basis. The auto segment saw net profit expand 39% YoY as better margins mitigated the effect of lower Toyota sales.

• Equipment saw sales improve as it leaned on the mining and logging sectors, amid weakness in the construction sector. Net profit grew a decent 4% YoY on a topline growth of 6% YoY.

• The manufacturing & engineering (M&E) segment managed to reap profit in the last two quarters as deliveries for the aerospace unit ramped up. While the unit saw a consecutive annual loss, the quantum was decreased to RM3.5mil from a loss of RM38mil in the previous year.

• UMW declared a total dividend of 7.50 sen/share in FY18, translating to a payout of 26% of its EPS. Yields are fair at 2.2–2.9% based on a payout assumption of 30%.

• We believe growth this year will rely on the ambitious volume target for Toyota, support from Perodua’s strong sales of the Myvi and introduction of the Aruz, and a continued improvement in the M&E segment as the aerospace unit gains momentum in production (with an eye on breakeven for 2HFY2020).

Source: AmInvest Research - 28 Feb 2019