• UMWH’s 9M20 core net profit came in at RM96m (-51% yoy), accounting for 82% and 70% of our and consensus full-year estimates.
• UMWH’3 3Q20 results recorded a strong qoq improvement as revenue rebounded to RM2.7bn (+74% qoq) and earnings returned to the black.
• Reaffirm HOLD on UMWH With a Higher TP of RM2.90.

9M20 Core Net Profit of RM96m; Above Expectations

UMWH‘s 9M20 core net profit fell by 51% yoy to RM96m on the back of dismal sales (-27% yoy) owing to a temporary production halt during the Movement Control Order period, decline in contribution from associates and a higher effective tax rate of 31% (vs 9M19 tax rate of 20% due to losses incurred in non-core subsidiary companies). However, the results were above our and consensus expectations, accounting for 82% and 70% of our and consensus full-year estimates. The variance to our estimate was due to higherthan-expected revenue and contribution from associates.

3Q20 Core Earnings Returned to the Black

Sequentially, UMWH’s revenue rose to RM2.7bn (+74% qoq) and core earnings recovered to RM80m (vs. 2Q20 core loss of RM47m) respectively. The recovery was largely due to the lockdown ease, and Toyota sales 3Q20 more than doubled to 18.6k units, helped by the sales & service tax (SST) exemption. This had also led to a stronger contribution from associates to RM94m (vs. 2Q20: RM3m), its highest since 4Q18; UMWH’s 38%-owned Perodua sales volume doubled to 70.8k units in 3Q20. UMWH’s EBITDA margins have also recovered by 0.3ppts qoq to 5.6% on cost optimisation initiatives.

In a Recovery Mode

During the briefing, UMWH guided that there will be launches for the facelifted versions of the Toyota Vios and Yaris in early-Dec 2020, and has received about 1k prelaunch bookings. We also gather that both Toyota and Perodua are slated to launch an SUV model in 2021. While the automotive outlook should improve sequentially, we think the segment could weaken assuming the government does not extend the SST exemption period. Elsewhere, the heavy equipment division remained lacklustre due to the slowdown/lockdowns from the key sectors abroad (ie, Myanmar mining, constructionrelated activities), but partly cushioned by the gradual recovery from the industrial equipment in sectors such as manufacturing, logistics and warehousing. As for the M&E segment, the Group expects the pick-up in auto sales from the SST exemption to support demand for the auto components sub-segment but cautioned that delivery for the aerospace sub-segment has slowed down due to the challenging market conditions.

Maintain Hold with a higher TP of RM2.90

We raise our 2020E core EPS by 29%, after taking into consideration the better 9M20 results but also a Sukuk payment of RM35m which falls due in the coming quarter. We also increase by c.2%-3% our 2021-22E core EPS to account for a softer recovery in Toyota sales volume. Post revision, we raise UMWH’s TP to RM2.90 based on lower valuation multiples for automotive and M&E segments – we anticipate car sales volume to moderate post the SST exemption period in 2021, and considering a continued downturn for the aerospace segment respectively. At 13x 2021E PER, valuation looks fair; the stock is trading close to the auto sector 5-year mean PER of 12.5x. Reaffirm HOLD.

Key risks

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 segments and higher-than-expected losses of O&G assets.

Source: Affin Hwang Research - 26 Nov 2020