UMWH reported a disappointing 2017 core net loss of RM168m, below market and our expectations due to higher than expected losses from its unlisted oil & gas business and weaker than expected automotive sales / profit margins. Looking into 2018, management expects higher automotive sales (+1% yoy), better earnings from equipment and lower losses from its oil & gas / aerospace business. While we are mildly positive on UMWH’s 2018 business outlook, we caution that its business environment remains challenging. UMWH’s share price has rallied by 21% in 3 months and its current valuation of 26x 2018E PER looks stretched. Downgrade to SELL.

2017 Core Net Loss of RM168m, Below Expectations

UMW Holdings (UMWH) reported a disappointing 2017 core net loss of RM168m, below market and our expectations. The earnings miss was due to higher than expected losses from its unlisted oil & gas business, as well as weaker than expected automotive sales / profit margins. High one-off charges (ie. asset impairment (RM281m), losses on demerger of UMW Oil & Gas (RM127m)) has dragged the headline net loss to RM651m. While the group continue to generate positive operating cash flow (RM446m in 2017, from RM291m in 2016), its free cash flow remained negative due to its high capex of RM1-1.2bn per annum in 2016-17. Similar to 2016, UMWH did not declare any dividend for 2017.

Management Guidance for 2018: Improving, But Still Challenging

Looking into 2018, management targets to sell more than 279,000 units of new vehicles in 2018, +1% from its 2017 sales of 275,332 units. Elsewhere, management expects better performance of the equipment segment in view of improved demand for heavy and industrial equipment. Besides, the production ramp up of fan cases should taper the operating losses at its aerospace unit.

Minor earnings tweak. We expect earnings improvement on lower oil & gas losses, higher automotive margins

Notwithstanding the weak results, we maintain our key forecast parameters: (i) we expect UMWH to dispose its unlisted oil & gas business by 1H18, translating to losses; and (ii) the stronger Ringgit and improving market sentiment should lift 2018E automotive sales and earnings, we believe. All in, we made some minor adjustments to our 2018-19E EPS post-results, but maintain our 12-month target price of RM5.08 based on an unchanged 20x 2018E PER.

Source: Affin Hwang Research - 28 Feb 2018