Investment Highlights

• We maintain HOLD on UMW Holdings but raise our SOP-based FV to RM6.29/share (from RM5.85/share) with an unchanged PE of 11x for the automotive segment.

• UMW’s 1HFY18 core net profit of RM201mil — which excludes RM101mil that comprises a reversal on provision — met 64% of our FY projection and 54% of consensus. We raised our FY18-20 projections by 18-21% to factor in stronger automotive earnings, a higher M&E contribution and better efficiency.

• 1HFY18 revenue fell 2% YoY but core net profit rose 61% YoY. We outline the key reasons for the strong performance to be:

1) The impact of a stronger ringgit against the USD. The group’s operating margin more than tripled to 6.2% in 1HFY18 from 2.0% in the previous period. Notably the margins for its auto and equipment segments improved. A 1.4ppt increase in the net profit margin for auto to 3.9%, held by the stronger ringgit and launch of a new Perodua model, led to the segment’s net profit rising 49% despite a 4% drop in revenue. Auto segment revenue fell on weaker Toyota sales in the 1QFY18 when buyers held back from purchasing ahead of the election. Toyota volume rebounded on a sequential basis in 2Q, with revenue improving 27% QoQ and net profit up 7% QoQ.

2) Higher associate earnings anchored to the Perodua Myvi. JV and associate earnings rose 53% YoY as Perodua sales were higher 17% YoY.

3) Strong performance of its equipment segment. Revenue rose 7% YoY and net profit rose 19% YoY. Topline was supported by higher export sales and stronger demand from the construction sector. However, UMW noted that job wins could be muted in the 2H given the cancellation of several major infrastructure projects. The segment is the second-most important, contributing about 13% of group revenue.

• Apart from this, we note that while the manufacturing & equipment segment is still making losses, its net loss shrunk 7% YoY. This was attributable to a revenue growth from the gradual ramp-up in deliveries by its aerospace unit, and a 45% improvement in the profit of the segment’s core operations of auto components and lubricants.

• We are assured of the earnings clarity and the group’s holistic growth plans. The auto segment will see a second Toyota plant come onboard next year, M&E playing a bigger role as aerospace earnings kick in and equipment starting to benefit from the restructuring of its Komatsu distribution.

Source: AmInvest Research - 30 Aug 2018