UMW Holdings (UMWH) reported a weak set of results – 6M19 core net profit dropped by 52% yoy to RM163m, due to weaker EBIT margins (- 2.8ppt to 3.6%) and higher interest expense. All in, the results were below expectations. In view of the lack of enthusiasm for Toyota vehicles and heavy equipment, we cut our 2019-21E EPS by 17%-24%, lower our TP to RM5.20 (from RM5.70). At 16x 2020E PER, valuations look fair. Reiterate HOLD.

6M19 Pretax Profit Lower by 32% Yoy

Despite the 8% yoy increase in revenue, UMWH’s 6M19 pretax profit was lower by 32% yoy to RM320m, due to weaker EBIT margins (-2.8ppt to 3.6%) and higher interest expense. On a segmental basis, the automotive segment only delivered 3% yoy increase in PBT to RM275m in 6M19, likely due to the lower-margin mix - Perodua continued to deliver decent sales volume (+4% yoy to 121.8k units) but lower Toyota sales volume (-2% yoy to 31.5k units). Elsewhere, the lower demand for heavy equipment saw equipment segment’s 6M19 PBT drop by 6% yoy to RM78m. The contribution from Manufacturing & Engineering (M&E) segment, however, improved to RM16m (6M18 LBT: RM3.4m) as more fan cases were delivered from the Aerospace sub-segment. All in, 6M19 core net profit was below market and our expectations (33% and 38% of the respective full-year forecasts). The variance against our forecast was due to lower-than-expected revenue, lowerthan-expected margins, and higher-than-expected associates’ contribution.

2Q19 Core Net Profit Lower by 10% Qoq

Sequentially, UMWH’s 2Q19 pretax profit was lower by 10% qoq to RM77m due to additional of sukuk expense and lower contribution from the equipment segment (-16% qoq). This was partly offset by higher contribution from automotive segment (+22% qoq, on higher Toyota sales volume +27% qoq and higher Perodua associate contribution) and positive contribution from M&E segment of RM13.2m (1Q19 PBT: RM2.3m).

Maintain HOLD Call With a Lower TP of RM5.20

We cut our 2019-21E core EPS by 17%-24%, after imputing the weak 6M19 results and lowered our revenue assumption, in view of the muted demand for Toyota vehicles and heavy equipment; and higher contribution from Perodua. In tandem, we are lowering our SOTP-derived price target to RM5.20 (from RM5.70; Fig 2). At 16x 2020E PER (close to the post O&G demerger average of 14x), valuations look fair.

Key Risks

Key upside risks: a strong rebound in vehicle sales, pick-up in construction and mining activities will spur equipment sales and strengthening of the RM. Key downside risk: intense competition in automotive and equipment segment and higher-than-expected losses of O&G assets.

Source: Affin Hwang Research - 28 Aug 2019