Investment Highlights

• We maintain HOLD on UMW Holdings (UMW) with a lower SOP-based FV of RM5/share (from RM5.20).

• For the remaining operations in 3Q17: revenue fell 5%YoY and it made a net loss of RM29mil vs. a profit of RM7mil last year. At its topline, lower Toyota sales (-10% YoY) were partially cushioned by higher equipment (+8% YoY) and M&E earnings (+8% YoY). At its bottomline, it saw lower net profit from auto (-19% YoY), as well as higher losses from its M&E segment and unlisted O&G assets.

• For 9M17, it made a net loss of RM92mil (this includes the losses from the listed O&G assets up to end-2Q when they were demerged, and excludes the loss on demerger of RM123mil) vs. a loss of RM124mil last year.

• For the 9M17 of its continuing operations only, revenue improved (+7%YoY) but it swung to a net loss of RM5mil (from profit of RM85mil last year). While its topline improvement was led by better Toyota sales (+11%YoY; with stronger sales of the Innova, Fortuner and Sienta), the auto bottomline fell on lower profitability (net margin down 0.4ppt to 3%), flat earnings from equipment, as well as significant losses from M&E and its non-core operations.

• The M&E segment is still carrying the set-up costs ("pre operating expenses") for the aerospace segment that is meant to see its first output by end-2017 and profit by 2019. Apart from this, UMW emphasized the other operations (auto components and lubricants) within the segment were in the black.

• Net losses from the unlisted O&G assets were still significant (RM91mil YTD). Recall that it had resolved to dispose of 12 of the 16 assets by year-end, so losses here are likely continue but on a gradual decline.

• We believe the signs for UMW's core operations to stage a stronger rebound following the demerger of the listed O&G unit are still hazy. Apart from selling off the remaining O&G assets, UMW has resolved to boost the profitability of its auto segment and contain the worst of the costs for the aerospace segment to this year.

• 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 - 29 Nov 2017