Adjusted for quarterly RM13.4m distribution for Perpetual Sukuk, core LATMI at -RM56.3m for 2QFY20, dragged 1HFY20 to LATMI –RM56.3m, vs. HLIB’s FY20 forecast of PATMI RM121.2m (in line) and consensus RM187.3m (below). We expect a stronger 2H20 mainly driven by higher automotive sales and automotive components sales under SST exemption period. Maintain HOLD with higher TP: RM2.75 (from RM2.58) based on lower 10% discount (from 15%) to SOP: RM3.03.

Within expectation. UMW reported core LATMI of -RM69.8m (adjusted for quarterly provision of RM13.4m Perpetual Sukuk distribution) for 2QFY20, which reversed 1HFY20 to LATMI of -RM56.3m as compared to HLIB’s FY20 forecast of RM121.2m and consensus of RM216.1m. We deem the result within 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 delivery of Rolls-Royce fan case. We have excluded net EIs of +RM14.7m in 1HFY20, mainly due to reversal of impairments, PPE disposal gain and forex gain (offset by investment disposal loss).

Dividend. None.

QoQ/YoY/YTD. Adjusted for quarterly distribution for Perpetual Sukuk, recorded core LATMI of -RM69.8m in 2QFY20 (vs. PATMI RM13.6m in 1QFY20 and RM79.1m in 2QFY19) and -RM56.3m in 1HFY20 (vs. PATMI RM149.2m in 1HFY19) mainly affected by the implementation of MCO since mid-March until May 2020.

Automotive. The segment was greatly affected by Covid-19 with the implementation of MCO, deteriorated consumer sentiments and implemented loan moratorium exercise (recognized RM44.1m share of loss in 30% owned associate Toyota Capital Malaysia due to present value impact of loan moratorium and unfavourable mark-to market value of interest rate swaps). Nevertheless, the group is guiding for strong automotive demand post introduction of SST exemption (15 Jun to 31 Dec 2020), as the group increased production rate at both Bukit Raja and Shah Alam plant. There will be facelift/updated model for Hilux, Innova and Fortuner in 2H20 and also Vios and Yaris in 2021, along with 2 new CKD models in 2021. We are cautiously optimistic on the outlook for the segment due to concurrent new model introductions by competitors in the same period.

Equipment. Demand for heavy 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, for earnings sustainability. Kayaba is expected to complete its capacity expansion by end 2020. UMW Aerospace production has seen some slowdown due to the severely affected air travel sector. Management is hopeful the new production for Trent 7000 to be able to cover the drop in existing production for Trent 1000.

Forecast. Unchanged.

Maintain HOLD, TP: RM2.75. Maintain HOLD recommendation on UMW with higher TP: RM2.75 (from RM2.58), based on lower discount of 10% (from 15%) to SOP of RM3.03, given the improved short term outlook of the automotive segment. Nevertheless, we believe Toyota will continue to face stiff market competition in 2021, post ending of SST exemptions.

Source: Hong Leong Investment Bank Research - 28 Aug 2020