Highlights/ Comments

• UMW’s earnings continued to disappoint in FY17, being dragged by various segments – Auto, UMWOG, Manufacturing, O&G unlisted and Others, on depreciation of RM against US$, subdued consumer sentiments, weak oil price and high start-up costs.

• The group recognized loss of RM126.9m for the demerger of UMWOG, write downs of RM10.9m for equipment segment and RM399.6m for O&G unlisted, and loss of RM253.9m of financial guarantees (related to the cessation of O&G unlisted USTPL) in FY17, on top of the impairments/provisions made in FY16, totaling RM780m for UMWOG and RM1,462m for O&G unlisted and others.

• In FY18, UMW will cease to further recognize any loss or profit contribution from O&G unlisted segment, which had been reclassified as discontinued operation/asset for sales with net asset value of RM155m. UMW will only recognize any disposal gain/loss when UMW completes the disposal/winding up exercises.

• Auto segment is expected to see some improvements in FY17 from new model launches, improving consumer sentiments and appreciating RM against US$. Management is targeting 279k sales in FY17 (70k from Toyota & Lexus and 209k from Perodua). The impact of every 1sen movement against US$ is RM5-6m/year. The new manufacturing plant in Klang is expected to commence operation in FY19, with remaining RM600m capex.

• Equipment segment will be leveraging on the up-coming 74:24 JV set up with principal Komatsu & Tico (K&T). With the involvement of K&T, the unit will further expand its product line up and offer more value added services.

• Manufacturing and engineering segment is expected to breakeven in FY18 as Rolls Royce fan case manufacturing plant ramp up production, after registering loss of RM16.3m in FY17 (dragged by RM60m start up loss).

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

• We increase FY18 and FY19 earnings by 23.3% and 12.8% after we remove the loss from O&G unlisted segment.

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

• We maintain Sell recommendation with unchanged TP of RM5.20 based on SOP, given that we have already applied zero valuation for O&G unlisted segment.

Source: Hong Leong Investment Bank Research - 5 Mar 2018