Results

• Below Expectation - Reported core net loss of RM92.7m in 3Q16, expanding 9M16 loss to RM106.3m as compared to HLIB forecasted earnings of RM78.7m for FY16 and consensus of RM110.4m.

Deviations

• Lower than expected sales and margins across all segments.

Dividends

• None.

Highlights

• YoY: Revenue dropped by 19.1% on overall lower sales across all segments – Automotive, Equipment, O&G (including UMWOG), Manufacturing and Others. Combined with higher cost structures, UMW reported core net loss of RM92.7m (from profit of RM71.1m in 3Q15).
• QoQ: Despite a flattish revenue of +0.4%, UMW reported a wider core net loss position, dragged by UMWOG, and Others segment (its valued business investments).
• YTD: Similarly, core net loss of RM106.3m in 9M16 was mainly dragged by disappointing automotive (lower sales and higher cost structures), UMWOG (lower utilization and charter rate) and Others segments.
• Outlook: Earnings for 4Q16 is expected to improve on the expectation of higher car sales volume (driven by new launches and aggressive marketing campaigns) and higher count of rigs utilization (commencement of Naga 6 and 8).
• Entering FY17, the renewed weakening bias of RM (against US$) may further affect the margins of automotive segment, with ongoing competitive pressure within the automotive sector (due to low consumer sentiments), while O&G segment is likely to remain depressed from low utilization and charter rate. The upcoming commencement of fan cowl manufacturing by 3Q17 is only expected to breakeven at the early stage.

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

• Cut earnings for FY16E to loss of RM102.5m (from profit of RM78.7m), FY17E to profit of RM115.8m (from RM293.1m) and FY18E to profit of RM384.7m (from RM440.0m) after imputing lower sales volume (automotive) and utilization rate (UMWOG) as well as higher losses for Others segment.

Rating

SELL (↔)

• UMW group continues to be dragged by weakened consumer sentiment, depreciating RM (against US$), and slowdown in oil & gas exploration activity. Furthermore, sustainability of dividend payout is a concern given consecutive losses, increased capex commitment and financing support to subsidiary UMWOG.

Valuation

• Maintained SELL recommendation with lower SOP based TP of RM4.00 (from RM4.38), post earnings revision.

Source: Hong Leong Investment Bank Research - 30 Nov 2016