We reiterate our HOLD rating on UMWH with a higher price target of RM5.08 (from RM4.40) based on 20x 2018E EPS. We change our valuation methodology to PER (from SOP) following the spinoff of its former subsidiary, UMWOG. We like UMWH’s progressive divestment of its non-listed O&G business and are also mildly positive on its 2018 new model line- up. Earnings recovery, however, may come in slower than expected as the progress trails our expectations.

Progressive Exit of Unlisted O&G Assets

UMWH maintains its plan to exit the O&G business. Active negotiations are ongoing for some of its remaining 14 unlisted O&G assets, following the disposal of Arabian Drilling services in Oman and a China O&G asset. Pretax losses (from O&G assets) has narrowed to RM35.6m in 3Q17, from RM70.6m in 2Q17. While we are positive on UMWH’s divestment plan, the process is taking longer than anticipated and losses may spill over into 2018, in our view.

MyVi Should Lift Perodua Sales, Toyota New Launches May Stir Interest

We expect UMWH’s automotive segment to perform better in FY18, driven by attractive new model launches and the strengthening of the Ringgit against the US$. We like Perodua’s award winning MyVi. With strong bookings of 28,000 units (since its launch in Nov17), MyVi should lift Perodua’s 2018-19 sales volume. Elsewhere, we are cautiously optimistic on Toyota’s 2018 sales prospects - their new model line up (CH-R, Rush, Camry, Harrier, Vios) looks exciting but their relatively high price points (CH-R, Camry, Harrier) may weigh on demand.

A Soft Touch for Heavy Equipment

Prospects for heavy and industrial equipment (10.7% of 2018E revenue) should remain soft, we believe, in view of the continued slowdown of activities in key sectors (ie. mining), intense competition from Chinese-produced heavy equipment and changes in regulatory framework in Myanmar. We are positive on the recently announced partnership with Komatsu, which should help expand UMWH’s products offering. That said, we expect near-term earnings contribution to be minimal.

Aerospace Contribution Only Fruitful in 2019E

UMWH has delivered its first fan case in Nov 2017, a major milestone for its aerospace business. Management expects the aerospace unit to break even by 2019 and to hit full production capacity of 250 fans by 2021.

Source: Affin Hwang Research - 3 Jan 2018