Results

• Below Expectations - Reported core net loss of RM8.4m in 3Q17, dragging down 9M17 to a net loss of RM83.4m as compared to HLIB’s forecasted earnings of RM138.9m for FY17 and consensus of RM195.3m.

Deviations

• Lower than expected contribution from Automotive segment and higher than expected losses from Manufacturing, O&G unlisted and others.

Dividends

• None.

Highlights

• YoY: Lower core loss in 3Q17 (vs. RM92.7m loss inclusive of UMWOG in 3Q16) after discontinuation of UMWOG (distributed out as dividend in specie). However, UMW ongoing operations worsened YoY, dragged by Automotive (RM depreciation); Manufacturing (start-up costs for Rolls Royce plant); O&G unlisted (lower market demand); and Other division.

• QoQ: Core loss narrowed (from RM70.8m loss in 2Q17) on improvement across all divisions, as the group continued to embark on cost restructuring and improved US$/RM position as well as discontinued recognition from UMWOG.

• YTD: Core loss of RM83.4m (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 division is expected to continue face competitive market, while Manufacturing segment is expected to improve with the commencement of RollsRoyce plant in 4Q17. UMW’s shares in UMWOG had 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

• We cut our FY17-19 earnings by 80.2%, 17.4% and 7.3% respectively to account for the slower than expected recovery from Automotive division, near term high preoperating expenses for Rolls-Royce plant and ongoing drag from O&G unlisted and other divisions.

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

• Maintain Sell with lower TP RM4.48 (from RM4.75). We believe UMW valuation is relatively steep at this juncture, given the low earnings (high growth due to low base) with unattractive dividend yield.

Source: Hong Leong Investment Bank Research - 29 Nov 2017