UMW reported PATMI of RM153.0m for 1HFY18, within HLIB expectation and consensus. Earnings growth YoY was due to improved sales and margin of automotive segment and lower losses from manufacturing and oil & gas segments. We adjusted forecasts marginally for FY18 (+0.3%), FY19 (-0.2%) and FY20 (+1.6%) for book keeping purpose. Maintain HOLD with slightly lower SOP derived TP of RM6.28 (from RM6.30).

Within expectation. UMW reported core PATMI of RM75.6m for 2QFY18 and RM153.0m for 1HFY18, achieving 47.8% of HLIB FY18 forecast and 45.1% of consensus. We have adjusted core PATMI for RM150m reversal of provision for financial guarantee and RM100m impairments for O&G unlisted book value in 2QFY18.

QoQ. Core earnings was relatively flat QoQ, following the stronger earnings of automotive segment (higher sales volume) was being offset by lower earnings from equipment segment (lower sales).

YoY & YTD. Core earnings improved YoY and YTD due to: (i) improved margins of automotive segment (on RM appreciation and strong sales of Perodua) and equipment segment (on higher export sales); (ii) lower losses drag from manufacturing, oil & gas (unlisted) and other segments; and (iii) exiting ownership of loss-making UMWOG.

Outlook. UMW is expected to maintain its profit momentum in 2HFY18, with stronger automotive sales volume (boosted by GST zerorisation) in 3QFY18 offsetting weaker sales (affected by SST implementation) and depreciation of RM/USD in 4QFY18. UMW Aerospace’s loss is expected to shrink gradually towards 2HFY18 as the facility gradually ramps up its production before starting to turn profitable in FY19.

Forecast. Adjusted our earnings marginally for FY18 (+0.3%), FY19 (-0.2%) and FY20 (+1.6%) following up-keeping of automotive segmental earning (attributed to UMW Toyota and Perodua) and unlisted O&G segment.

Maintain HOLD, TP: RM6.28. We adjusted lower our SOP-derived TP to RM6.28 (from RM6.30) 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 - 30 Aug 2018