Investment Highlights

• We maintain HOLD on UMW with an SOP-based FV of RM5.50 based on an FY18F PE of 12x for its auto segment. UMW saw a core net loss of RM90mil in FY17 vs. a core net loss of RM361mil in FY16. This was above our projection of a RM115mil loss but below consensus' projection of a net profit of RM55mil.

• This takes into account the loss from the listed O&G unit up to its demerger in June, and excludes EIs comprising mainly a provision for impairments on PPE and JVs, the re-measurement of a financial guarantee contract and the loss on demerger.

• FY17 topline improved 6% YoY to RM11bil on higher sales for all three of its core segments. However, net profit sank 57% YoY as profitability fell for the automotive and equipment segments, and the rest remained loss-making.

• Going by segment:

1) Automotive: Revenue improved 6% YoY as Toyota sales rebounded 9% YoY in 2017 (after a 32% YoY drop in 2016), but net profit declined 13% YoY as margins were compressed by a weaker RM.

2) Equipment: Revenue rose5% YoY on strong demand for spare parts and after sales services for its Komatsu distribution. Net profit slipped 2% YoY due to a provision for slow-moving inventory.

3) Manufacturing & Engineering: Revenue climbed7% YoY on the cost savings initiatives for its auto components unit, but the M&E segment saw losses balloon to RM38mil due to start-up costs for the aerospace unit. The aerospace unit delivered its first fan case in November and is targeted for breakeven in 2019.

4) O&G: Losses from the remaining O&G assets fell 15% YoY following the disposal of certain assets and a RM286mil write-down.

• In 4Q17 revenue was flat YoY while losses shrank due largely to the impairment on the unlisted O&G assets.

• With the M&E segment in the backseat for the immediate term, we reiterate the priorities to be:

• (1) To regain market share for Toyota, relying largely on the Vios and Hilux which collectively made up two thirds of Toyota sales last year. The new Harrier (from RM238K), C-HR (from RM146K), Rush and Camry would also contribute. UMW targets a flattish sales growth from the 70K (in Toyota and Lexus units) sold last year, as competition intensifies in 1H17 from players wanting to clear stock and launch festive promotions.

• (2) To complete its exit from O&G by year-end. It has 13 assets to dispose of by this self-imposed deadline. Losses from this segment will continue although the quantum should reduce over time.

Source: AmInvest Research - 28 Feb 2018