Results

• Below Expectation - Reported core net profit of RM70.4m in 2Q15 and RM243.0m in 1H15, achieved only 36.2% of HLIB’s FY15 expectation and 32.3% of consensus.

Deviations

• Mainly dragged by lower margins on lower sales volume (automotive, equipment and manufacturing divisions), lower charter rates and utilization rates (O&G), and higher operational costs (inputs and marketing expenses).

Dividends

• Announced first interim single tier dividend of 10 sen/share (similar to last year). We have cut our dividend expectation for FY15 to 25 sen (from 35 sen).

Highlights

• Automotive: 2Q15 earnings improved 11.9% qoq to RM130.6m (due to higher sales volume), but dropped 28.6% yoy on weaker volumes and higher sales and promotional expenses. The automotive industry is expected to remain tough and competitive in 2H15 due to stringent lending guideline, weaken consumer sentiments (post implementation of GST) and RM depreciation.

• Equipment: 2Q15 earnings dropped on lower sales revenue due to lower demand for heavy equipment (slowdown in construction and mining sectors) and industrial equipment (lower spending by business in view of economy slowdown). UMW continued to bank on demand for heavy equipment from Myanmar’s jade mining sector.

• Oil & Gas: 2Q15 earnings reflect the downturn of demand for jack-up rigs. UMWOG suffered from depressed utilization rates and time charter rates as well as higher expenses from Naga 7. PATAMI dropped by 92.5% yoy and 86.1% qoq.

• Manufacturing & Engineering: Barely breakeven in 2Q15, due to lower demand for autoparts and lubricants in view of slowdown in automotive sector in Malaysia and China.

• Others: Continued losses, indicating longer than expected turnaround, given drop in crude oil prices.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.
• Appreciation of US$.
• Plunge in crude oil price and slowdown in O&G exploration.

Forecasts

• We have cut earnings for FY15-17 by 31-39% in view of the weaker market demand and higher costs structures.

Rating

SELL

Positives

• 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; and 2) Investing into new business segment.

Negatives

• 1) Slump in crude oil prices affecting demand and charter rates for jack-up rigs; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.

Valuation

• Maintained SELL recommendation with lower SOP based TP: RM6.85 (from RM9.44) after cutting earnings estimates and lowered P/E multiples on weakened market sentiment.

Source: Hong Leong Investment Bank Research - 27 Aug 2015