Adjusted for quarterly distribution for Perpetual Sukuk, core PATMI at RM4.0m for 4QFY19 (-95.3% QoQ; -86.8% YoY) and RM236.9m for FY19 (-18.3% YoY), was below HLIB’s FY19 forecast (73.5%) and consensus (71.0%). The disappointment was mainly attributed to higher losses of Others segment. 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 FY20 by 15.6% and FY21 by 13.9%. Maintain HOLD with lower TP: RM3.20 (from RM4.25) based on 15% discount (from 10%) to SOP: RM3.77 (from RM4.72).

Below expectations. UMW reported core PATMI of only RM4.0m (adjusted for quarterly provision of RM13.4m Perpetual Sukuk distribution) for 4QFY19 (-95.3% QoQ; -86.8% YoY) and RM236.9m for FY19 (-18.3% YoY), achieving 73.5% of HLIB’s FY19 forecast and 71.0% of consensus. The disappointment was mainly due to higher than expected losses from Others segment. We have excluded net EIs of +RM213m in 4QFY19 and +RM190m in FY19, mainly due to gain from disposal of land bank, property and equipment, and investments.

Dividend. Declared a final dividend of 2 sen/share (ex-date: 13 March), cumulating to 6 sen/share for FY19.

QoQ/YoY. Adjusted for quarterly distribution for Perpetual Sukuk, core earnings deteriorated significantly by -95.3% QoQ and -86.8% YoY on the back of lower profit contribution from associate Perodua and Equipment segment (slowdown in sales), and higher losses from Others segment.

YTD. Core earnings declined by 18.3%, dragged by Others segment, partially cushioned by turnaround of Manufacturing & Equipment (following improvement in efficiency and utilization) and O&G unlisted (following divestment and operational cease).

Automotive. UMW will continue to leverage on the sustainable sales of Perodua, while Toyota may face stiff competitions with attractive new launches by close competitors in 2020-2021. We remain cautious on the negative impact from the depreciated RM/USD, deteriorating consumer sentiment (due to Covid-19 and domestic political uncertainty) 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 FY20 by 15.6% and FY21 by 13.9%.

Maintain HOLD, TP: RM3.22. Maintain HOLD recommendation on UMW with lower TP: RM3.22 (from RM4.25) based on higher discount of 15% discount (from 10%) to lower SOP of RM3.77 (from RM4.72) following cut in earnings. Despite UMW share price at a historical low, we reckon that valuations are fair at 1.0x P/B at 11.7x P/E with 3.1% dividend yield.

Source: Hong Leong Investment Bank Research - 28 Feb 2020