UMW reported PATMI of RM292.6m for 9MFY18, within HLIB expectation and consensus. Earnings growth YoY was due to improved sales and margin of Automotive and Equipment segments and lower losses from Manufacturing and O&G segments. We note that UMW has not provided c. RM34.9m for the distribution of RM1.1bn Perpetual Sukuk that was issued back in Mac 2018. We adjusted forecasts marginally for FY18 (+2.5%), FY19 (+2.4%) and FY20 (+0.5%) for book keeping purpose. Maintain BUY with higher TP: RM5.60 (from RM5.35) based on 10% discount to SOP: RM6.25.

Within expectation. UMW reported core PATMI of RM139.5m for 3QFY18 and RM292.6m for 9MFY18, achieved 80.1% of HLIB FY18 forecast and 80.3% of consensus. We note that UMW has not provided for the distribution for 10-years Perpetual Sukuk of RM1.1bn that was issued at end Mar 2018. Based on 6.35% periodic distribution rate, UMW would have to provide for RM17.5m for 3QFY18 and RM34.9m for 9MFY18 i.e. core PATMI for 3QFY18 and 9MFY18 would have been lowered to RM122.0m and RM257.7m respectively.

QoQ. Core earnings increased by 84.5% to RM139.5m, following the turnaround of Manufacturing segment (on improved production efficiency) and Other segment. Despite the stronger automotive revenue, the automotive segmental PATMI was relatively flat, mainly due to stronger Toyota/Lexus earnings contribution, partially offset by weaker associate Perodua contribution.

YoY. Similarly, significant earnings improvement from core LATMI of RM8.4m, mainly due to stronger Automotive segment (on higher group sales volume), turnaround of Manufacturing segment and Other segment.

YTD. Core earnings improved by 230% to RM292.6m due to: (i) improved margins of Automotive segment (on stronger RM/USD and higher sales volume) 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 into FY19, with stronger automotive sales volume on new launches of Toyota (Vios, Camry and Yaris) and Perodua (SUV), partially offset by the negative impact from the depreciating RM/USD. UMW Aerospace will gradually to ramp up its production before turning profitable in FY19. The recent conclusion of UMW-Komatsu JV (Sep 2018) was aimed to improve the product offerings of Komatsu in the region and enhance earnings of Equipment segment. UMW’s continued effort to exit O&G unlisted segment by early 2019 will remove the drag of this segment to the group.

Land sales. UMW has announced the disposal of its Shah Alam land (38.8 acres) for RM287.7m. UMW will also enter into a tenancy agreement for part of the land for 3 years with yearly rental of RM12.6m, in order to facilitate the movement of operations into UMW High Value Manufacturing Park in Serendah. Post the completion of the exercise in 2QFY19, UMW is expected to recognise a gain of RM171.4m.

Forecast. Adjusted our earnings marginally for FY18 (+2.5%), FY19 (+2.4%) and FY20 (+0.5%) following up-keeping of earnings for Automotive segment (attributed to UMW Toyota and Perodua) and Manufacturing segment.

Maintain BUY, TP: RM5.60. Maintain BUY recommendation on UMW with higher TP: RM5.60 (from RM5.35) based on 10% discount to SOP: RM6.25 as UMW leverages on the attractive line up of new Toyota and Perodua launches, while Aerospace Manufacturing continues to ramp up production and return to profits in FY19.

Source: Hong Leong Investment Bank Research - 3 Dec 2018