Results

• Below expectations - Reported core net loss of RM44.5m in 4Q17 dragged FY17 to a core net loss of RM127.9m as compared to HLIB’s forecasted earnings of RM74.9m for FY17 and consensus of RM80.0m.

Deviations

• Lower-than-expected contribution from equipment segment and higher-than-expected losses from manufacturing, O&G unlisted and others.

Dividends

• None.

Highlights

• YoY: Turned to core loss in 4Q17 (vs. RM36.7m profit in 4Q16), dragged by lower automotive contribution, start-up cost for Rolls-Royce fan case manufacturing plant and higher losses for O&G unlisted and others segments.
• QoQ: Core loss widened (from RM8.4m loss in 3Q17) due to higher losses for O&G unlisted and others segments.
• FY17: Turned to core loss in FY17 (vs. RM88.5m profit in FY16) due to lower automotive contributions, high start-up costs (Rolls Royce fan case manufacturing) and cessation costs and operational loss related to O&G unlisted and others segment.
• Outlook: Automotive division will continue to face competition. The group is targeting sales volume of over 70k units for Toyota (including Lexus) and 209k units for Perodua. Expected new launches for Toyota include upgraded Vios, new Camry, new C-HR and new Harrier, while for Perodua include facelift Alza and new SUV model. Perodua will continue to ride on the existing strong demand for newly launched MyVi model.
• Rolls-Royce fan case manufacturing operation is expected to remain in the red in 2018 due to underutilization of the facility. The plant is only expected to turnaround by 2020.
• The group is taking pro-active measures (fully impaired) to exit O&G unlisted segment in 2018 (recognized under discontinued business in 4Q17). Hence, there will be no further impact from this segment in 2018.

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, relatively high US$ against RM and continued losses from Rolls Royce fan case manufacturing plant in 2018. Furthermore, sustainability of dividend payout is a concern given consecutive losses and increased capex commitment.

Valuation

• Maintain Sell with unchanged TP RM5.20. We believe UMW valuation is relatively steep at this juncture, given the low earnings with unattractive dividend yield.

Source: Hong Leong Investment Bank Research - 28 Feb 2018