Adjusted for quarterly distribution for Perpetual Sukuk, core PATMI at RM83.3m for 3QFY19 (+5.8% QoQ; -8.8% YoY) and RM233.0m for 9MFY19 (+4.7% YoY), was below HLIB’s FY19 forecast (67.6%) and consensus (53.1%). The disappointment was mainly attributed to lower than expected contribution from Equipment and M&E segments. UMW will continue to leverage on Perodua and M&E (mainly aerospace) segment for earnings growth, while Toyota and Equipment segment remains unexciting. Cut earnings for FY19 by 6.5%, FY20 by 17.3% and FY21 by 19.7%. Maintain HOLD with lower TP: RM4.25 (from RM5.20) based on 10% discount to SOP: RM4.72.

Below expectations. UMW reported core PATMI of RM83.8m (adjusted for quarterly provision of RM14.0m Perpetual Sukuk distribution) for 3QFY19 (+5.8% QoQ; -8.8% YoY) and RM233.0m for 9MFY19 (+4.7% YoY), achieved 67.6% of HLIB’s FY19 forecast and 53.1% of consensus. The disappointment was mainly due to lower than expected contribution from Equipment and Manufacturing & Engineering (M&E) segments.

Dividend. Declared a special dividend of 4 sen/share (ex-date: 12 Dec 2019).

QoQ. Adjusted for quarterly distribution for Perpetual Sukuk, core earnings improved by +5.8% mainly driven by stronger Perodua contribution and lower group tax rate.

YoY. Core earnings declined by 8.8%, mainly due to a high base effect for both Automotive and Equipment segments during the tax holiday period last year.

YTD. Core earnings improved marginally by 4.5% on higher contribution from Perodua (higher sales volume) and lower losses from discontinued O&G operations.

Automotive. UMW will continue to leverage on the growth of Perodua (Aruz and updated Axia), while Toyota may face stiff competitions with upcoming attractive new launches by close competitors in 2020-2021. We remain cautious on the negative impact from the depreciated RM/USD, deteriorating consumer sentiment and heightened competitive market in 2020.

Equipment. Demand for equipment (mining, construction and logging) remains sluggish in the near term, given the slowdown of domestic as well as regional economic activity. The anticipated re-commencement of mega projects may provide some growth to the segment.

M&E. Automotive parts will leverage on the increasing local car production volume, namely Perodua and Proton for earnings sustainability. UMW Aerospace production ramp up plan is on track to turn profitable in FY20.

Forecast. Cut earnings for FY19 by 6.5%, FY20 by 17.3% and FY21 by 19.7%.

Maintain HOLD, TP: RM4.25. Maintain HOLD recommendation on UMW with lower TP: RM4.25 (from RM5.20) based on 10% discount to SOP of RM4.72 (from RM5.78) following cut in earnings. We believe UMW is fairly valued at its current level.

Source: Hong Leong Investment Bank Research - 5 Dec 2019