UMW Holdings (UMWH) reported a weak set of results – 9M19 core net profit fell 45% yoy to RM239m, mainly due to a weaker EBIT margin (-2.3ppts yoy to 3%). All in, the results were below street and our expectations. We think UMW’s near-term prospects look lethargic, in view of the subdued demand for Toyota vehicles and heavy equipment. We cut our 2019-21E EPS by 6-8% to factor in the weak 9M19 results and weaker margins. We reiterate our HOLD rating on UMWH with a lower TP of RM4.75 (from RM4.90). At 15x 2020E PER, the valuation looks fair.

Sequentially, 3Q19-core Pretax Profit Was Flat at RM150m

Sequentially, UMWH’s 3Q19 headline net profit doubled to RM103m as 2Q19 was hit by: i) additional sukuk expense, ii) a higher effective tax and iii) losses from discontinued operations of RM2m. Excluding these negatives, 3Q19 pretax profit was flat at RM150m (-1% qoq), due to weaker contribution from the Automotive and Equipment segments that was partially offset by higher contribution from Manufacturing & Engineering (M&E) segment. The restated

2Q19 pretax profit was RM152m due to an omitted elimination for the reversal of provision for a financial guarantee of RM27m). The Automotive 3Q19 PBT fell by 7% qoq to RM140m on a lower Toyota sales volume (-6% qoq to 16k units); the sluggish demand for both heavy and industrial equipment also saw

the equipment segment 3Q19 PBT drop by 13% qoq to RM31m. On a brighter note, the M&E segment 3Q19 PBT improved by 18% qoq to RM15m as more fan cases were delivered from the Aerospace sub-segment.

9M19 Core Net Profit Fell by 45% Yoy; Below Expectations

Although 9M19 revenue was flat at RM8.6bn, UMWH reported a weak 9M19 core net profit of RM239m (-45% yoy), which was below street and our expectations (62% and 69% of the respective full-year forecasts). The earnings disappointment was mainly due to weaker-than-expected EBIT margins (9M19: -2.3ppts yoy to 3%) from the Automotive and Equipment segments. UMWH declared a 4 sen special dividend for 3Q19.

Maintain HOLD Call With a Lower 12-month TP of RM4.75

We cut our 2019-21E core EPS by 6%-8%, after imputing the weak 9M19 results and lowering our auto and equipment margins. In tandem, we lower our TP to RM4.75 (from RM4.90; Fig 2). At a 15x 2020 PER (close to the post O&G demerger average of 14x), the valuation looks fair. Key upside risks: a strong rebound in vehicle sales, pick-up in equipment sales and strengthening of the RM (vs. the US$). Key downside risk: intense competition in automotive and equipment segment and higher-than-expected losses of O&G assets.

Source: Affin Hwang Research - 29 Nov 2019