O&G division continues to bleed

UMW’s net losses widened to RM128.8m in 3Q16 as oil and gas (O&G) division posted operating loss of RM133m. We maintain our earnings forecasts pending a management meeting. Maintain SELL rating with unchanged SOTP of RM4.52.

9M16 headline earnings miss expectations

UMW’s core losses continued to widen in 3Q16 at RM128.8m against a RM12.1m loss in 2Q16. 9M16 core net losses came in at RM124.4m which miss our and street expectations. Its business continued to be impacted by the weakening Ringgit, challenging automotive sales and O&G division.

O&G division deteriorated further qoq

Revenue was rather flat at RM2.8bn qoq with automotive sales inching up 4%. However, this was offset by the other business segments namely equipment (-2.4%), manufacturing and engineering (-7.9%) and O&G (- 16.9%). Core net losses widened in 3Q16 as the O&G division continued to be a drag to earnings with only NAGA 1 partially working in 3Q16.

Outlook

Automotive sales will likely remain challenging on the back of the weak consumer sentiment while the equipment segment should remain weak due to low activity levels in the mining and logging sectors. Meanwhile, sluggish demand will continue to impact the manufacturing and engineering segment, but support is likely from increased European market exports and OEM sales. For UMWOG, we believe 4Q16 will see a rebound from 3Q16 low as NAGA 6 and 8 have been deployed for work. However, the outlook for drilling market remains soft.

Maintain SELL with a TP of RM4.52

We maintain our earnings forecasts pending an update from a management meeting. Maintain SELL rating with an unchanged SOTP based TP of RM4.52. Risks to our recommendation include; i) higher-thanexpected sales volume growth for Toyota and Perodua, and (ii) a sharp rebound in oil prices, which will lead to improvement in its O&G segment.

Source: Affin Hwang Research - 30 Nov 2016