1Q17 Supported by Higher Auto Sales

UMW’s 1Q17 results were in line with our expectations, with a reported headline profit of RM20.2m. The better yoy results were due to the positive TIV numbers recorded in 1Q17, which resulted in topline and associate line growth. UMW recorded free cash flow (FCF) of RM170.3m in 1Q17, which was a huge improvement compared to 1Q16’s FCF of negative RM918.5m. 2H17 will likely see a better performance as the current loss-making oil and gas division will be demerged from the group. With the business outlook still gloomy in 2017, we downgrade UMW to a SELL rating with an unchanged SOTP-based 12-month TP of RM5.05.

Headline Profit Turned Out to be Core Net Loss…

Stripping off a series of one-offs as follows: (1) RM1.7m reversal of impairment loss on receivables, (2) RM3.8m inventory write-off, (3) RM5.2m disposal gain on PPE, (4) RM4.4m forex gain, (5) RM17.1m derivative gain and (6) RM0.1m PPE write-off, the headline net profit of RM20.2m became a core net loss of RM4.5m.

… But Loss Narrowed Yoy on More Positive TIV Numbers

Overall revenue grew 27.5% yoy to RM2,803.6m in 1Q17, mainly due to better performance by the automotive and M&E (manufacturing and engineering) divisions. Automotive revenue increased 40.8% supported by the higher sales volume from Toyota (+59.2% yoy) of 16.7k units in 1Q17. Associate contributions soared 81.6% yoy partly due to a higher sales volume from Perodua (+6.5% yoy) of 50.3k units in 1Q17.

Losses of Listed Oil and Gas Division (UMWOG) Widened

Loss before tax for its listed oil and gas business (UMWOG) widened 53.4% yoy to RM104.9m in 1Q17 on the back of weaker revenue (-15.3% yoy) mainly due to a weaker daily charter rate. Utilisation rate for 1Q17 was relatively flat yoy at 25% with NAGA 6 & 8 working in 1Q17 and NAGA 7 & 8 working in 1Q16.

Still Bearing Half-yearly Losses of Listed Oil and Gas Arm

We adjust our EPS forecasts slightly post-housekeeping adjustments to take into account the release of annual report figures. With a 15% downside potential, we downgrade UMW to a SELL rating (from HOLD). Key upside risks: a strong rebound in auto sales and improved consumer spending.

Source: Affin Hwang Research - 24 May 2017