UMW Holdings (UMWH) reported a good set of results, exceeding expectations. 9M18 core net profit expanded by more than five-fold to RM475m (vs. 9M17 of RM76m), attributed to the higher contribution from its three core segments and associates. Given the strong showing in 9M18, we raise our FY19-21E earnings by 8-21% and 12- month TP to RM6.45. Maintain BUY.

9M18 Pre-tax Profit Expanded by 189% Yoy

UMWH’s 9M18 pretax profit rose by 189% yoy to RM682m, driven by (i) better performance from the three core segments, (ii) higher associate contribution (+49% yoy, 9M18 Perodua car sales +11% yoy) and (iii) lower losses from the unlisted oil & gas (O&G) operations. The automotive segment grew 44% yoy on higher Toyota sales (+7% yoy) and improved EBIT margins (+1.6 ppts to 6.1%) thanks to the tax holiday boost. Toyota’s 10M18 sales of 58k units is on track to hit the 2018 sales target of 70k units; Perodua is likely to exceed the 2018 sales target of 209k units, in our view. Elsewhere, the equipment segment grew 14% yoy on better performance from the industrial equipment. While we note that no O&G assets were disposed this quarter, we believe the losses will likely lessen further as the Group remains committed to exit the O&G industry moving forward. All in, 9M18 results was ahead of both consensus and our expectations, achieving 132% and 94% of our respective forecasts.

Weaker Sequentially, But Only Due to One-off Boost in 2Q18

Operationally, UMWH 3Q18 performance was commendable on similar positives mentioned above. However, 3Q18 pretax was lower by 23% qoq due to a reversal of provisions of RM100m in 2Q18, likely from the unlisted O&G segment, we believe.

Disposes Shah Alam Land; Relocates Operations to Serendah

Per Bursa announcement, UMWH will be disposing the industrial land in Shah Alam for a cash consideration of RM287.7m. The Group will relocate the ongoing business operations (ie. mainly equipment and M&E operations) in Shah Alam to the proposed UMW High Value Manufacturing Park in Serendah. The proposed disposal is expected to be completed by 2Q 2019, which may see an expected one-off gain of RM171.4m in 3Q 2019.

Maintain BUY with higher TP of RM6.45

We raise our 2018-20E core EPS forecasts by 8%-18% to factor in the (i) higher-than-expected 9M18 results, (i) lower effective tax rate of 21% (previous forecast at 25%), (iii) higher contribution from associates, and (iv) higher investment income. In tandem with our earnings upgrade, we raise our SOTP to RM6.45 (from RM6.30). At 10x 2019E PER, we believe valuations is attractive, in view of the (i) new volume-generative Toyota model line-ups, (ii) decent growth from UMWH’s two core segments, (iii) lower losses from the unlisted O&G operations and (iv) higher Perodua association contribution. Downside risks include higher-than-expected losses of O&G assets and weaker-than-expected vehicle sales.

Source: Affin Hwang Research - 3 Dec 2018