UMW recorded a 2Q17 headline net loss of RM54m. On a cumulative basis, automotive as well as manufacturing and engineering (M&E) segments registered a yoy growth, while equipment and listed/unlisted O&G segments recorded declines. We cut our FY17 earnings forecast by 50% to reflect only the continuing operation of the business. We also trim our FY18-19E earnings by 6-11% to factor in weaker margins. We reiterate our SELL rating with a lower target price of RM4.82 as we roll forward our valuation to FY18.

1H17 Results Missed Estimates

UMW reported a headline loss of RM54m in 2Q17. After adjusting for one-offs which consists of: (1) RM6.1m impairment loss on receivables, (2) RM4.4m inventory write-down, (3) RM4.6m PPE disposal gain, (4) RM0.5m provision made on PPE and inventories, (5) RM83.7m forex losses, and (6) RM77m derivatives gain, core net loss narrowed to RM40.6m. We did not include the loss on demerger of subsidiary as the loss is recognised under ‘’discontinued operation’, which is not the focus of the report. To sum up the 1H17 results, UMW’s cumulative core net profit of RM13m achieved only 5% of our and consensus full-year estimates. The variance against our forecast is due to weaker operating margins and higher-than-expected effective tax rate.

YoY – Improved Revenue and Faced With Margin Pressure

The automotive segment reported a 3.8% yoy increase in revenue to RM2.3bn in 2Q17 driven by higher demand for Innova and Fortuner models. M&E segment revenue was lower by 2% yoy as it faced intense competition while equipment segment was relatively flat yoy. The automotive and equipment segments both saw a 26% yoy decline in profit as a result of strengthening in the US$ which increase cost of imports for automotive and hence negatively impacted margins amidst a competitive operating environment for the equipment segment.

Maintain SELL

We affirm our SELL rating on UMW and cut our target price to RM4.82 (from RM5.05) as we roll forward our valuation to 2018, removed UMWOG from our valuation and assume zero value for its non-listed O&G business. With the demerger exercise completed, the O&G units will no longer be a drag to earnings. However, a recovery of the automotive segment seems too optimistic for the time being. Key upside risks: a strong rebound in auto sales and improved consumer spending.

Source: Affin Hwang Research - 29 Aug 2017