Results

• Within Expectation - Reported core net loss of RM15.2m in 2Q16, dragged down 1H16 to losses of RM13.6m as compared to HLIB’s forecasted earnings of RM78.7m for FY16 (but below consensus of RM199.4m). We consider the numbers to be in line as we expect stronger 2H16 earnings mainly driven by stronger automotive sales on new launches by Toyota and Perodua, as well as improving utilization of rigs (under UMWOG).

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Revenue dropped by 18.3% on lower automotive sales (Toyota and Lexus) and UMWOG (lower utilization and charter rate). Reversed to core net loss of RM15.2m on lower revenue and higher cost structure (related to automotive imported input costs as well as sales and marketing costs).

• QoQ: Despite revenue improving by 29.4% (on higher automotive sales and higher rigs utilization), UMW turned to net loss position, being dragged by Others segment (its valued business investments).

• YTD: Similarly, core loss of RM13.6m in 1H16 was mainly dragged by disappointing automotive (lower sales and higher cost structures) and UMWOG (lower utilization and charter rate).

• Outlook: UMW has cut Toyota & Lexus sales target downwards to 70k units for 2016 (from 85k) despite YTDJuly only achieving 33.1k sales. On a bright note, Perodua has been receiving encouraging orders for Bezza (at 1k orders/day), which will support stronger earnings in 2H16 for automotive segment. UMWOG is also expected to report lower losses in 2H16 on new contracts for NAGA 6 for 2 years. Meanwhile equipment and manufacturing segments are expected to be relatively stable despite soft market conditions.

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 recommendation with unchanged SOP based TP: RM4.38.

Source: Hong Leong Investment Bank Research - 30 Aug 2016