Results

• Above Expectation - Reported core net loss of RM4.3m in 1Q17 as compared to HLIB’s expected FY17 profit of RM9m. However the result was below consensus forecast of RM227m profit for FY17.

Deviations

• We deem the result above expectation as 1Q17 result was dragged by UMWOG loss of RM58m. By 2H17, we expect UMWH to return to profit (from current breakeven level) post de-consolidate UMWOG.

Dividends

• UMWH had proposed to distribute its stake in UMWOG to its shareholders by 2H17, entailing dividend yield up to 12.7%.

Highlights

• YoY: Revenue increased by 27.5% on overall stronger sales from Automotive and M&E segments, which was partially offset by lower contribution from O&G (including UMWOG) and Equipment segments. However, core result turned into red due to lower net contribution from UMWOG, M&E and others. Note that net contribution from Automotive was flat YoY due to lower margins (dragged by weakened RM).

• QoQ: Similarly, core profit (excluding impairments due to kitchen sinking) in 4Q16 turned to core loss in 1Q17 on lower net contribution from Automotive segment.

• Outlook: 2017 will remain a tough year for UMW operation across all the segments. We remain caution on automotive segment on on-going subdued consumer sentiment, weakened RM and tough competitive market environment.

• The equipment segment is expected to remain affected by the weak demand from mining and plantation sectors (weak prices of resources and commodities) while construction sector remains competitive.

• M&E segment is expected to be stable, but being dragged by start-up cost of Rolls-Royce manufacturing plant in 2017. The plant is only expected to contribute positively in 2018.

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

• Raise FY17, FY18 and FY19 earnings forecasts to RM138.9m (from RM3.6m), RM318.2m (from RM253.9m) and RM485.5m (from RM457.5m) respectively, mainly on lower losses from O&G (unlisted) segment.

Rating

HOLD ( ↔ )

• Potential realizable dividend yield of up to 12.7% (dependent on share price movement of UMWOG). However, concerns remain on management commitment in exiting Oil & Gas (unlisted) segment by end 2017.

Valuation

• We maintain HOLD recommendation with higher TP of RM5.50 (from RM5.35) based on SOP, post adjustment on earnings. Our SOP valuation assigns zero value for its O&G (unlisted) segment, as UMW had virtually fully impaired these assets and investments

Source: Hong Leong Investment Bank Research - 24 May 2017