Highlights/ Comments

• UMW faces deteriorating market conditions for its automotive and O&G (including valued business) divisions.

• 51% owned Toyota has set a lower target of 87k sales (including 2k sales from Lexus) for FY16 as compared to FY15’s 95.9k sales (including 2.1k sales from Lexus). New launches for 2016 are Hilux (2Q16), Innova (3Q16), Fortuner (3Q16) and upgraded Vios (launch date unconfirmed). With the expected lower sales volume and continued competitive market, margins are likely to stay weak (despite increased prices) in FY16 for high marketing and distribution costs as well as full year impact from weaker RM against US$ (FY16 to be RM4.10/US$ vs. FY15’s effective RM3.90/US$).

• 38% owned Perodua is likely to perform weaker in FY16 (vs. circa RM410m in FY15) despite higher target of 216k sales (vs. FY15’s 213.3k sales), given lower revenue mix and full year impact from RM depreciation in FY16. Perodua is expected to launch new Sedan by 2H16 to boost sales.

• The weak oil price at US$30-40/bbl has affected the profitability of 55.7% owned UMWOG and the O&G valued business, due to weak demand and pricing.

• Concerns arise on dividend payments due to weaker cashflow from automotive division as well as potential UMW extending inter-company loan to UMWOG to restructure its short-term loan obligation of RM2.3bn (as at Dec 2015). Furthermore, UMW will have to start spending on its capex for new manufacturing plant (commence operation by 2017) for fan cases for Boeing 787. Total dividend for FY15 was 20sen (RM233.6m), near record low for the past 10 years.

• Furthermore, UMWH is at risk of being removed from FBMKLCI list of 30 counters by next review in June 2016. At the current share price of RM6.73, UMW’s free float market capitalization is listed at 38th spot (lower than the minimum 36th spot). Lack of near term catalysts, UMW’s share price is unlikely to perform and climb above 36th spot.

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

• Unchanged.

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 with unchanged Target Price of RM5.50 based on SOP.

Source: Hong Leong Investment Bank Research - 16 Mar 2016