Results

• Within Expectation - Reported core net loss of RM70.8m (including UMWOG loss of RM28.4m, but excluding demerger loss of RM126.9m) in 2Q17, dragging down 1H17 to a net loss of RM75.0m as compared to HLIB’s forecasted earnings of RM138.9m for FY17 (but below consensus of RM261.8m). We deem the numbers to be in line as we expect stronger 2H17 earnings mainly driven by seasonally stronger automotive sales, deconsolidation of UMWOG and commencement of Rolls Royce aerospace plant.

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Excluding demerger loss of RM126.9m, UMW reported core loss from profit of RM64.8m, dragged by worsened margin across all segments: Automotive (RM depreciation); Equipment (competitive market); Manufacturing (start-up costs for Rolls Royce plant); O&G unlisted (lower market demand); and Other division.

• QoQ: Core loss expanded (from RM4.2m) on lower contribution from Equipment, larger losses from Manufacturing, O&G (unlisted) and Other division.

• YTD: Similarly, core loss of RM75m (including UMWOG loss of RM86.4m) was dragged by weaker margins of the overall group, affected by weaker RM (automotive), competitive market (across all segment), start-up costs (manufacturing) and low demand (O&G and other division).

• Outlook: Automotive and Equipment segments are expected to continue face competitive market, while Manufacturing segment is expected to be sustainable with Rolls-Royce plant commencing operation in 4Q17. UMW remains committed to exit O&G segment by end 2017. UMW’s shares in UMWOG have been fully distributed (in specie) to shareholders in early July, avoiding further drag from UMWOG.

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 market.

Forecasts

• Unchanged.

Rating

• SELL

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

Valuation

• Downgrade to Sell (from Hold) with lower TP RM4.75, after removing UMWOG valuation from SoP. We believe share price has run ahead of UMW fundamentals due to distributional of UMWOG shares.

Source: Hong Leong Investment Bank Research - 29 Aug 2017