Results

• Below Expectation - Reported core net loss of RM633.3m in 4Q16, expanding FY16 loss to RM739.5m as compared to HLIB forecasted loss of RM168.3m for FY16 and consensus of RM68.2m.

Deviations

• Lower than expected sales and margins across all segments as well as kitchen sinking exercises on Oil&Gas segments (both listed and unlisted).

Dividends

• Proposed distribution of its 55.73% shareholding in UMW- OG to UMW shareholders, which may fetch RM0.65/share (upon disposal) or 11.6% dividend yield.

Highlights

• YoY: Revenue dropped by 26.8% on overall lower sales across all segments – Automotive, Equipment, O&G (including UMWOG), Manufacturing and Others. Combined with higher cost structures and kitchen sinking exercises, UMW’s core net loss expanded to RM633.3m.
• QoQ: Similarly, core net loss expanded drastically, mainly on kitchen sinking exercises.
• YTD: FY16 reverted to net loss of RM739.5m (from RM263.6m profit), dragged by kitchen sinking exercises.
• Outlook: UMW is strategizing itself into 3 core business segments – Automotive, Equipment and Manufacturing. UMW will distribute out its stake in UMWOG to its shareholders by mid-2017 (demerger) and progressively dispose the remaining oil & gas (unlisted) assets by end 2017, in order to streamline its earnings and improve its balance sheet. UMW will still have to consolidate the expected loss from UMWOG for 1H17.
• 2017 will remain a tough year for UMW, given subdued consumer sentiments and weakened RM as well as slowdown in the demand for industrial and heavy equipment (mining and construction). Nevertheless, 2017 will still be an improvement in term of lower loss or break-even (vs. 2016).
• Earning growth will be more prominent in 2018-2019 with new contribution from Rolls-Royce manufacturing plant.

Risks

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

Forecasts

• FY17 and FY18 earnings forecast adjusted to RM9.0m and RM253.9m from RM3.6m and RM361.2m respectively.

Rating

HOLD (↓)

• Potential realizable dividend yield of up to 11.6% (dependent on share price movement of UMWOG). However, concerns remain on management commitment in exiting Oil & Gas segment by end 2017.

Valuation

• Given the recent surge in share price following HLIB previous upgrade, we downgrade our recommendation to HOLD with lower TP of RM5.35 (from RM5.60) based on SOP.

Source: Hong Leong Investment Bank Research - 28 Feb 2017