UMWH Holdings (UMWH) reported a higher 2018 core net profit of RM491m (2017: RM35m) which was ahead of market but fell short of our expectations. The earnings miss was due to a disappointing 4Q18 where revenue and profits contracted sharply, largely attributed to weak Toyota sales although partly mitigated by higher associates’ contribution. We trim our 2019-20E EPS by 7-9%, lower our TP to RM5.90 and downgrade UMWH to HOLD. UMWH’s share price has performed well (+28% since our last report publication); at 13x 2019E PER, valuations look fair.

4Q18 Earnings Weaker Sequentially (-56% Qoq)

UMWH’s 4Q18 core profit shrank 90% qoq resulting in the earnings miss. While associates contribution jumped 68% qoq in tandem with better Perodua sales, EBIT margins declined a sharp 4.5ppts qoq to merely 0.7%. While there was some one-offs (mainly Impairment on PPE of RM45m and provision for impairment losses on receivables of RM13m), the adjusted EBIT of RM76m was still down 55% qoq. This was largely on the back of a sharp contraction in revenue (-18.5% qoq) in 4Q18, which was led by a decline in revenue from the automotive segment (-23% qoq). A run-down of Toyota Vios inventory, in anticipation for the upcoming 2019 Vios model was largely the culprit. Equipment revenue was rather stable qoq.

2018 Pre-tax Profit Jumped by 195% Yoy

UMWH’s 2018 pre-tax profit jumped by 195% yoy to RM786m, driven by higher earnings growth across all segments. Automotive grew 22% yoy to RM545m on higher Toyota and Perodua vehicle sales (due to overwhelming response for the Myvi) and improved PBT margins (+1.1ppt to 6.1%), due to lower discounting during the tax holiday period between June to August 2018. Equipment segment also grew (+6.5% yoy to RM152m), but we are lukewarm to its immediate growth prospect due to the uncertainties in Malaysia’s construction sector. Elsewhere, the M&E segment continues to show positive signs – 2018 PBT rose to RM22m (vs 2017 LBT of RM18m) as the delivery for the aerospace unit continues to pick up. We believe the

losses from the unlisted O&G unit will continue to narrow - 2018 LBT of RM161m (vs 2017 of RM520m) as the Group remains committed to divest the O&G business. Also, UMWH declared a 2.5 sen dividend in 4Q18 (2018: 7.5 sen).

Source: Affin Hwang Research - 28 Feb 2019