Investment Highlights

• We maintain HOLD on UMW Holdings (UMW) with an unchanged SOP-based fair value of RM5. For 1H17, the group saw a net profit of RM24mil from its continuing operations (excluding losses from the listed O&G unit — which was demerged in July — and the accompanying costs of the exercise), down 31% YoY.

• Taking into account the discontinued operations (which would be carried in its books to July), the group made a net loss of RM62mil vs. a net profit of RM5mil 1H16. This was far below our projection of a RM270mil net profit for the full year and consensus RM262mil.

• For 1HFY17 revenue improved 14% YoY but PBT dropped 45% YoY (numbers provided by the group for these are for the continued operations only). We delineate the YTD performance for group's three remaining core businesses: automotive, equipment and manufacturing and engineering (M&E) which accounted for 80%, 12% and 6% of topline respectively:
   
  1. Auto: Revenue was higher by 19% YoY due to new launches and strong demand for the Innova and Fortuner (Toyota sales improved 24% YoY), but a stronger USD was blamed for a 2 ppts decline in PBT margin to 4%. While it sold much more cars, it was earning much less from each car. The spike in sales was largely due to the low base of 1Q16 (when sales dipped below 3K/month due to price hikes introduced from January); 1Q17 sales were up 62%YoY while 2Q17 was up 1%YoY.
  2. Equipment: Revenue held up commendably (slipping 2% YoY against the background of soft demand for industrial equipment), PBT fell 13% YoY due to the lower topline and smaller margins (declined 2 ppts to 10%).
  3. M&E: Revenue rose 6%YoY but the segment swung into a pre-tax loss of RM7mil from PBT of RM18mil a year ago. Ongoing operations made a PBT of RM18mil, but setup costs for the incoming aerospace manufacturing unit (to start producing in 4Q) had ballooned to RM24mil (from RM7mil in 1H16), dragging the M&E segment into the red. The aerospace unit is targeted for profit from 2019.
      
• Aside from this, losses from the remaining O&G assets are still substantial. The group targets to dispose these by end-2018. It saw a net loss of RM71mil (up 56% YoY) from these assets in 1H17. This follows the cessation of drilling operations in Oman, which led to a lower revenue contribution and some redundancy expenses.

• While margins may ease for the auto segment going forward, we believe it will be challenging to offset the declining performance of the equipment segment, the setup costs under M&E segment and the continuing losses from the unlisted O&G assets.

Source: AmInvest Research - 29 Aug 2017