Adjusted for quarterly RM13.4m distribution for Perpetual Sukuk, core PATMI at RM13.0m for 1QFY20 (-30.9% QoQ; -80.6% YoY), above HLIB’s FY20 forecast (15.5%) as we expect recovery in 2H20, but below consensus (6.0%). We expect a stronger 2H20 due to higher automotive sales (SST exemption) and higher delivery of Rolls-Royce fan case. Upgraded earnings for FY20 by 44.2% and FY21 by 26.5%. Maintain HOLD with higher TP: RM2.58 (from RM1.60) based on lower 15% discount (from 20%) to SOP: RM3.03.

Above expectation. UMW reported core PATMI of RM13.0m (adjusted for quarterly provision of RM13.4m Perpetual Sukuk distribution) for 1QFY20 (-30.9% QoQ; -80.6% YoY) as compared to HLIB’s FY19 forecast of RM84.1m (15.5%) and consensus of RM216.1m (6.0%). We deem the result above our expectation (but below consensus) as we expect earnings recovery in 2H20, driven mainly by government’s introduction of SST exemption of car purchases from 15 Jun to 31 Dec 2020 as well as higher Rolls-Royce fan case. We have excluded net EIs of +RM13.3m in 1QFY20, mainly due to reversal of impairments, PPE disposal gain and forex gain (offset by investment disposal loss).

Dividend. None.

QoQ/YoY. Adjusted for quarterly distribution for Perpetual Sukuk, core earnings deteriorated further by 30.9% QoQ and 80.6% YoY on the back of lower group sales and lower profit contribution from associate Perodua, mainly affected by the implementation of Movement Control Order (MCO) by mid-March.

Automotive. The segment will benefit from the introduction of SST exemption for car purchases from 15 Jun to 31 Dec 2020. Nevertheless, 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 recovery of local car production volume, namely Perodua and Proton for earnings sustainability. UMW Aerospace production remained on track to ramp up in 2020.

Forecast. Upgraded earnings for FY20 by 44.2% and FY21 by 26.5%, following our expectation of recovery of automotive sales (due to SST exemption) and equipment sales (due to ramping up of Rolls-Royce fan case production) by 2H20. Introduce FY22 earnings at RM321m.

Maintain HOLD, TP: RM2.58. Maintain HOLD recommendation on UMW with higher TP: RM2.58 (from RM1.60), following earnings adjustments and based on lower discount of 15% discount (from 20%) to SOP of RM3.03. We believe Toyota will continue to face stiff market competition in 2020-2021.

Source: Hong Leong Investment Bank Research - 16 Jun 2020