Adjusted for quarterly RM13.4m distribution for Perpetual Sukuk, core PATMI at RM64.6m for 3QFY20, reverted 9MFY20 to PATMI RM8.3m, in line with HLIB’s full year PATMI forecast of RM121.2m and consensus RM136.7m. We expect continued strong earnings in 4QFY20 mainly driven by higher automotive sales and automotive components sales under SST exemption period. Maintain HOLD with unchanged TP: RM2.75 based on 10% discount to SOP: RM3.03 as we expect stiff competitions in 2021 due to several concurrent new model introductions by close competitors.

Within expectation. UMW reported core PATMI of RM64.6m (adjusted for quarterly provision of RM13.4m Perpetual Sukuk distribution) for 3QFY20, which reverted 9MFY20 back to PATMI of RM8.3m as compared to HLIB’s FY20 forecast of RM121.2m and consensus of RM136.7m. We deem the result within expectations as we expect much stronger earnings momentum in 4QFY20, driven mainly by strong car sales prior to the ending of SST exemptions. We have excluded net EIs of +RM34.1m in 9MFY20, mainly due to reversal of impairments, PPE disposal gain and forex gain (offset by investment disposal loss).

Dividend. None.

QoQ. Adjusted for quarterly distribution for Perpetual Sukuk, UMW returned to core PATMI RM64.6m from LATMI –RM69.8m (in 2QFY20) mainly driven by strong recovery of automotive sales volume since SST exemptions implemented in Jun 2020 as well as recovery to Toyota Capital (from loan moratorium impact in 2QFY20).

YoY. Core earnings declined 22.9% YoY, due to lower actual Toyota car sales (to dealers) which was partially offset by higher contribution from Perodua as well as improved margins from both manufacturing and equipment segments.

YTD. Core earnings declined 96.4% YoY, as group operations were affected by Covid-19 and implementation of MCO.

Automotive. Management is upbeat on strong automotive sales in 4QFY20 (due to SST exemption). Entering FY21, UMW will be banking on several attractive new models from Toyota (confirmed Vios facelift, Yaris facelift and an entry level SUV model) and Perodua (confirmed D55L SUV and expected Myvi facelift). 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. Nevertheless, the management has been able to improve the margins from on-going cost optimization initiatives.

M&E. Automotive parts will leverage on the recovery of local car production volume, for earnings sustainability. Kayaba has completed its +20% capacity expansion in Nov 2020. Management is strategizing for product diversification into both aero and nonaero manufacturing, while implementing cost-optimization initiatives.

Forecast. Unchanged.

Maintain HOLD, TP: RM2.75. Maintain HOLD recommendation on UMW with unchanged TP: RM2.75, based on unchanged discount of 10% to SOP of RM3.03. We believe Toyota will continue to face stiff market competition in 2021, post ending of SST exemptions, while the recovery of equipment and aerospace manufacturing will be relatively weak.

Source: Hong Leong Investment Bank Research - 26 Nov 2020