UMW posted a headline loss of RM29.4m in 3Q17 (-45.6% qoq, -77.2% yoy). On a cumulative basis, overall revenue grew by 7.2% yoy but was still affected by falling margins and intense competition. Although UMW’s earnings may be depressed in the nearer term due to a challenging market environment, we believe the recovery in consumer sentiment and the strengthening of the RM will spur more activity for UMW going forward. We raise UMW to a HOLD (from SELL) with a higher target price of RM 5.03.

9M17 Below Expectations

Despite the higher revenue of RM8.2bn (+7.2% yoy), the group registered a net loss of RM117.5m (+1.1% yoy) due to weaker operating margins, negatively impacted by forex and the competitive operating environment. Cumulative 9M17 losses were larger than expected. The higher topline came from the automotive, manufacturing and engineering (M&E) as well as the equipment segments. The Automotive segment climbed 9.5% yoy aided by better sales in car models such as Innova, Fortuner and Sienta with a boost in sales promotion activities. However, margins remained weak, averaging 4.5% vs 5.8% in 9M16. The equipment segment also grew marginally by 1.1% in 9M17 on the back of higher demand for spare parts and services. As for M&E segment, the business was up 6.4% yoy due to strong demand for shock absorbers and more promotional campaigns.

Sluggish Yoy Earnings

Excluding the Automotive segment, the Equipment segment and M&E segment grew by 7.7% and 7.8% respectively. The automotive segment reported a – 6.5% yoy drop in revenue in 3Q17 due to lesser demand for Toyota vehicles in anticipation of new model launches. On the brighter note, equipment segment’s improved performance was attributed to higher heavy equipment sales in Malaysia coming from higher construction activities and increased exports for parts in Myanmar. The M&E segment was also up thanks to increased contribution from the auto components manufacturing business.

Raise to HOLD With New TP at RM5.03

We now assume UMW to record a full year loss for 2017E and raise our FY18-19E earnings slightly by 2.5%-0.6% post some housekeeping adjustments. Our SOP based target price is lifted to RM5.03 (from RM4.82 previously) post some adjustments. With limited stock price downside, we raise UMW to a HOLD.

Source: Affin Hwang Research - 29 Nov 2017