UMW Holdings (UMWH)’s 1Q19 core net profit declined by 10% yoy to RM85.7m, below market and our expectations (17% and 16% of the respective full-year forecasts). The earnings disappointment was mainly due to weaker-than-expected margins from the automotive and equipment segments. We cut our 2019-21 core EPS forecasts by 18-19% and reiterate our HOLD rating on UMWH with a lower target price of RM5.70.

1Q19 Earnings Declined by 10% Yoy

Despite the 15% yoy increase in revenue, 1Q19 core net profit fell by 10% yoy, mainly dragged down by the 9% yoy decline in PBT. Higher depreciation from the new Bukit Raja plant and lower-than-expected contribution from 38%- associate, Perodua (due to the investment cost for the Aruz platform) resulted in the automotive segment’s 1Q19 PBT margin dipping by 1ppt yoy to 5.8%. Also, the stiff pricing competition among equipment players squeezed the equipment segment’s 1Q19 PBT margin by 1ppt yoy to 11%. Overall, the results were below market and our expectations – UMWH’s 1Q19 core net profit accounted for 17% of the street’s and 16% of our full-year earnings forecasts. No dividend was declared for 1Q19 (vs 1Q18 DPS of 5 sen).

Sequentially, Core Profit Was Higher on Low Base Effect

Sequentially, UMWH’s 1Q19 core net profit increased by almost six-fold due to the low base effect in 4Q18. UMWH’s 4Q18 PBT margin declined to a mere 3.9%, mainly due to a run-down of Toyota Vios inventory as well as numerous one-offs. Elsewhere, in spite of the higher 1Q19 Perodua sales (+9% qoq to 60.7k units), associate contribution declined by 32% qoq due to the investment cost for Perodua Aruz’ platform mentioned above.

Reaffirm HOLD Call With a Lower TP of RM5.70

We cut our 2019-21 core EPS by 18-19%, incorporating lower automotive margins, a higher depreciation rate for the automotive segment (6.5% cost of asset; previously at 4.5%) as well as a revision in our RM/US$ assumption. We maintain our HOLD call with a lower SOTP-based TP of RM5.70 (from RM5.90) after rolling forward our valuation to 2020E. At a 15x 2019E PER (close to the post O&G demerger average of 14x), its valuation looks fair. Key upside risks: a strong rebound in vehicle sales, a pick-up in construction and mining activities that spurs equipment sales and strengthening of the RM. Key downside risks: intense competition in the automotive and equipment segments and higher-than-expected losses of O&G assets.

Source: Affin Hwang Research - 23 May 2019