UMW reported a disappointing 1QFY19 core PATMI of RM69.8m (adjusted for additional RM17.7m distribution for Perpetual Sukuk for the quarter), achieved only 18.2% of HLIB’s FY19 expectation and 14.0% of consensus, due to lower than expected sales volume and margins across all segments. We cut FY19-20 earnings by 5.3% and 6.5% respectively and introduce FY21 earnings at RM520.8m. Maintain SELL with lower SOP-derived TP of RM4.75 (from RM4.80) based on 10% discount to SOP of RM5.29.

Below expectation. UMW reported core PATMI for 1QFY19 at RM69.8m (adjusted for the provision of RM17.7m distribution for Perpetual Sukuk for the quarter), which was below HLIB’s FY19 expectation (18.2%) and consensus (14.0%), due to lower than expected contribution across all segments on lower sales volume and overall margins.

Dividend. None.

QoQ. Core earnings improved by 45.8%, mainly due to lower losses in relation to the operations of holding co and intersegment, as well as higher net contribution from Equipment segment.

YoY. Core earnings improved by 11.6%, on improved contribution from Automotive segment (on higher car sales volume and improved RM/USD, which was partially offset by higher start-up cost in relation to the new Bukit Raja assembly plant) and lower losses from both M&E segment (ramping up production of Rolls Royce fan cases) and O&G unlisted segment (divestment exercise since 2018).

Outlook. UMW is expected to continue leverage on its range of recent new launch car models i.e. Toyota Vios, Toyota Yaris and Perodua Aruz while ramping up production of Rolls Royce fan cases in FY19. However, the automotive segment will be affected by the recent depreciation of RM/USD while the high start-up cost of Bukit Raja plant may drag its earnings for the year. Management has also cautioned on the increasing competitive automotive market and heavy equipment market.

Forecast. Cut earnings for FY19 by 5.3% and FY20 by 6.5% respectively, after lowering our assumptions on automotive sales volume and automotive margins. We introduce FY21 earnings at RM520.8m.

Maintain SELL, TP: RM4.75. Maintain SELL recommendation on UMW with lower TP: RM4.75 (from RM4.80) based on 10% discount to SOP of RM5.29. We opine that UMW’s valuation is relatively expensive as compared to its automotive peers with unattractive dividend yield. Furthermore, we are concerned on the impact of RM depreciation and cautious consumer sentiment on automotive market.

Source: Hong Leong Investment Bank Research - 29 May 2019