Investment Highlights

• We maintain HOLD on UMW Holdings (UMW) with a higher SOP-based fair value of RM5.20 (from RM5) after reducing the projected losses from the unlisted O&G segment and M&E segment. We are assured that the group appears to be concise with its key actions it needs to take to improve its core segments.

• Key points from an analyst briefing held yesterday:
  1. Charting a complete exit from O&G. Following the demerger of UMWOG in June, the group is still left with 16 assets that have dented its bottomline significantly in the past. It aims to dispose of most of these (12 of 16) by the year-end. It has received offers and is in final negotiations for certain assets. Operational losses from this segment (unlisted O&G) will continue although the quantum should reduce over time. It saw a net loss of RM71mil in 1H17 largely due to the cessation of drilling operations in Oman.
  2. Auto on cruise control. The next addition to the local Toyota line-up may only be the CH-R in early 2018. UMW is still finalizing the pricing for this model although road shows have been underway since May. It is sticking to the sensible target of 70K in sales for 2017, having accomplished 48% of this in the first half of the year. With volume stabilizing, UMW will focus on strengthening Auto margins which have declined to 4% (from 8-14% in previous years) by: (1) improving the amount of local content and number of CKD models; (2) continuing talks with Toyota to obtain better pricing; (3) riding on any sustained strength in the ringgit going forward.
  3. Lift off into Aerospace. The group is on track to make its first delivery of fan cases for the Rolls-Royce contract in 4Q. It did not disclose the initial earnings contribution or details on the volume ramp-up that is meant to make this a profitable area for UMW by 2019. Management believes that start-up costs should peak this year. Recall that the aerospace (or high-value manufacturing) operation dragged the M&E segment into the red in 1H17 with set-up costs of RM24mil.
• To this end, the immediate goals for UMW would be to fortify the positions of its core segments and dispose of the remaining O&G assets. FY18 would be an especially precarious year as it works to set a stronger foundation while counting on a more stable external environment.

Source: AmInvest Research - 20 Sept 2017