UMW reported strong PATMI of RM77.4m for 1QFY18, above HLIB expectation, following higher profit from automotive segment and smaller loss from oil & gas unlisted and other segments. Declared surprise interim net dividend of 5 sen. We raise FY18-19 earnings by 20.4% and 9.5% respectively. Maintain HOLD with higher SOP-derived TP of RM6.30.

Above expectation. UMW reported core PATMI for 1QFY18 at RM77.4m, which was above HLIB’s FY18 expectation (29.1%), but within consensus (22.8%). The stronger than expected earnings was mainly attributed to higher profit from automotive segment and lower losses from oil & gas unlisted and other segments, as the group continued to cease and scale down the operations.

Surprise dividend. Declared an interim net dividend of 5 sen following the group’s restructuring exercises.

QoQ & YoY. Core operation returned back into profit of RM77.4m in 1QFY18, following losses in 4QFY17 and 1QFY17, due to: (i) improved margins of automotive segment (on RM appreciation and strong sales of Perodua) and equipment segment (on higher export sales); and (ii) lower losses drag from oil & gas unlisted and other segments.

Outlook. UMW is expected to maintain its profit momentum in 2QFY18 following the RM appreciation and implementation of zero-rated GST in June 2018. However the upcoming implementation of SST in 2H18 will increase automotive prices and have negative impact on automotive sales demand, while depreciation of RM/USD towards 2H18 will affect the automotive margins. UMW Aerospace is expected to remain in the red in FY18 as the facility gradually ramps up its production before starting to turn to profit in FY19.

Forecast. Increased profit forecast for FY18 by 20.4% and FY19 by 9.5% to reflect the lower loss of oil & gas and other segments. We introduce FY20 earnings at RM563m.

Maintain HOLD, TP: RM6.30. We raise our SOP-derived TP to RM6.30 from RM6.10 following the adjustment in earnings. Do note that we have already assigned nil valuation for its unlisted and other segments which are loss-making. We believe the current share price has already priced in the potential earnings accretion from the acquisition of stakes in MBMR and Perodua and hence retain our HOLD rating.

Source: Hong Leong Investment Bank Research - 23 May 2018