UMW Holdings (UMWH) reported a strong set of results – 1H18 core net profit increased almost four-fold to RM320m (vs 1H17 of RM82m), driven by growth across all segments. The results were above expectations. We see higher earnings from the auto segment, driven by higher sales, better margins and favourable forex movement. Maintain HOLD with unchanged TP of RM5.90. At 18x 2019E PER, we believe that valuations is fair.

1H18 Pretax Profit Grew 140% Yoy, Above Expectations

UMWH’s 1H18 pretax profit rose by 140% yoy to RM449m, driven by higher earnings from the automotive and equipment segments, as well as a RM100m reversal of provisions. In particular, the automotive segments delivered a stellar 44% growth in pretax profit, driven by higher sale (strong buying interest during tax holidays) and improved profit margins (lower discounts, favourable price movement). All in, 1H net profit of RM320m was above our and street’s expectations – accounting for 94% and 86% of FY18 forecasts respectively. The variance against our forecast was due to higher-than-expected EBIT margins of 6% (vs. forecast of 2%) and higher-than-expected associates’ contribution.

2Q18 PBT Rose 105% Qoq

Sequentially, UMWH’s 2Q18 pretax profit came in higher at RM301m (+105% qoq) due to higher contribution from automotive segment (+13% qoq, aided by the stronger sales from zero-rated GST period), reversal of provision (RM101m) as well as lower M&E segment losses, partly offset by lower contribution from equipment segment (-15.9% qoq) and lower associate contribution (-5.6% qoq).

Maintain HOLD With Unchanged TP of RM5.90

We raise our 2018E core EPS forecasts by 49% after imputing the strong 1H18 results and another strong quarter (3Q18) in anticipation of higher car sales during the tax-free period. However, we expect the stiff competition and the hike in car prices from the reintroduction of SST would adversely affect appetite on big-ticket spending (4Q18). As such, we maintain our 2019-20E EPS forecasts, HOLD rating and target price of RM5.90. At 18x 2019E PER, we believe valuations is fair. Key upside risks: a strong rebound in vehicle sales, strengthening of the Ringgit. Key downside risk: intense competition and stricter of hire purchase approvals.

Source: Affin Hwang Research - 30 Aug 2018