• UMW Holdings (UMWH) posted a core net loss of RM47m in 2Q20 (vs. core net profit of RM21m in 2Q19), due to the negative impact of the MCO.
• The results were below expectations – 6M20 core net profit of RM16m accounted for 9-10% of the consensus and our full-year estimates.
• We cut our 2020-22E EPS forecasts by 9-28%, and lowered our TP to RM2.80. At 17x 2021E core PER, UMWH’s valuation looks fair. Downgrade to Hold.

Sequentially Weaker Due to MCO

As anticipated, the halt in business operations during the Movement Control Order (MCO) was the main culprit behind UMWH’s core net loss of RM47m in 2Q20 (vs. core net profit of RM63m in 1Q20). Notably, UMWH’s 2Q20 revenue fell by 28% qoq to RM1.5bn, its weakest quarterly revenue in our records. The 2Q20 EBITDA margin was squeezed by 1.3ppts qoq to 5.4% as the weaker sales were not able to offset the fixed overheads. In addition, 2Q20 contribution from associates (adjusted for reversal of provision of 30%-owned Toyota Capital) plunged by 93% qoq to RM3m: 38%-owned Perodua’s 6M20 sales volume dropped by 39% yoy to 74k units.

6M20 Core Net Profit Fell by 83% Yoy, Below Expectations

On a cumulative basis, UMWH posted a 6M20 core net profit of RM16m (-83% yoy) due to the above-mentioned reasons. Overall, earnings were below consensus and our expectations, accounting for 9%-10% of the respective full-year estimates. The variance to our estimate was due to the lower-than-expected associate contribution. Moving past 1H20, we believe the cheaper car prices from the sales and service tax exemption period should aid a recovery in 2H20 automotive earnings. Based on MAA’s monthly data, UMWH’s car brands are seeing signs of recovery – Toyota’s July20 TIV rebounded by 70% mom to 7.5 units, while Perodua’s July20 TIV recovered by 9% mom to 23k units. During the briefing, management guided for a gradual pick-up for the equipment segment with the restart of activities and revival of infrastructure projects. However, we believe the M&E aerospace segment could be softer moving forward, considering the challenging outlook for the airline industry amid the Covid-19 pandemic.

Downgrade to Hold With Lower TP of RM2.80

We cut our 2020-22E core EPS by 9-28%, after imputing the weak 6M20 results, and lowered our margin assumptions for the automotive and M&E segments. In tandem, we are lowering our 12-month SOTP-derived price target to RM2.80 (from RM3.10). At 17x 2021E core PER, it is trading close to +1SD of the 5-year auto sector forward PER of 16x. Hence, we downgrade our rating to HOLD (from Buy). Key upside risks: a strong rebound in vehicle sales, pick-up in equipment sales and strengthening of the RM (vs. US$). Key downside risks: intense competition in automotive and equipment segment and higher-than-expected losses of O&G assets.

Source: Affin Hwang Research - 28 Aug 2020