Result

• UMW reported a widened net loss of RM1566.2m for its 4Q16 against net losses of RM128.8m last quarter and RM286.04m a year ago. Meanwhile, revenue stood at RM3062.31m, which was up 7.2% q-o-q but down 26.4% y-o-y.

• As for the full year of 2016, the Group also reported a widened net loss of RM1690.5m as compared to net loss of RM38.9m in 2015. Meantime, revenue declined by 24% y o-y to RM10965.1m.

• Below expectations – The Group’s results were significantly below our expectation and consensus. The negative variance was mainly due to huge losses incurred for its oil & gas division.

Comment

• Dismal automotive division. Toyota sales dropped 32% y-o-y in 2016 to 65110 units due to rigid lending requirements and higher base in 2015 with the pre emptive buying prior to implementation of GST. Furthermore, the intense competition among car makers and weak consumer sentiments coupled with Ringgit weakness also affected the segmental performance.

• Perodua sales improved in 2H16. Perodua sales increased 12.7% in 2H16 as compared to 1H16 thanks to the launch of first sedan model, Bezza in 3Q16. Overall, it commanded the largest market share of 35.7% in 2016. On q-o-q, Perodua sales also increased 5% against last quarter underpinned by massive promotion and discount during year end period.

• Hike in Toyota sales during last quarter. On q-o-q, Toyota sales jumped by 11.5% as we believe the models launched have been yielded positive results. Toyota came out with Energy Efficient Vehicle (EEV) incentive models in 4Q16 for its face-lift model, Toyota Vios and new Innova. Moreover, the demand also lifted by aggressive promotion and discount offered to customers during the end of the year.

• Equipment division showed frail results in 2016. Topline and bottomline for equipment division in 2016 showed negative yearly growth, dragged down by low commodities prices which resulted in the slowdown in foreign mining activities and hence causing lower equipment demand. As compared to last quarter, both PBT and revenue also declined by 3.5% and 8.8% respectively. At the same time, the strict regulation imposed by government of Myanmar on heavy equipment importation also caused the weak performance for equipment division. To recap, 2015 experienced robust sales in equipment division due to higher volumes of forward purchase for its industrial equipment prior to GST implementation as well as large orders from Myanmar for heavy equipment pursuant to comprehensive jade mining activities.
   
• Gloomy O&G segment – UMW’s net loss widened in 2016 as oil and gas (O&G) division posted a pre-tax loss of RM1183.54m from a PBT of RM349.40m in 2015. The huge loss in this segment was due to slowdown in O&G exploration that contributed to decline in asset utilisation with lower charter rates. Moreover, a higher impairment of RM 780.2m was recorded in 2016 versus RM336.5mill as recoverable amount in asset further deteriorated.
   
• Improvement in M&E division. Manufacturing & Engineering’s PBT showed an increase of 46.7% yoy for 2016 thanks to higher contribution from shock absorber business. This was also supported by the disposal of the loss-making automotive component companies in India started in November 2015 which was fully completed by 2H2016.

Earnings Outlook/Revision

• We cut our net earnings forecast for FY17 by 14% to RM202.61m (previously RM234.21m) as we lowered the earnings contributions from Automotive, Equipment and O&G segments amid challenging business outlook to persist in 1H17.

• We also take this opportunity to introduce our earnings forecast for FY18F of RM297.9m, which implies a net profit growth of 44% as we foresee meaningful recovery for the Group’s business segments especially with the divestment of its listed and non-listed O&G businesses.

• Strategic plans in place to resume growth momentum. Our sales forecast reflects better contribution from its auto division with the new launch of one Toyota model in addition to the new launch of Perodua Axia facelift as well as new Myvi in 1H2017. Over the longer run, the Group also expects to enjoy economies of scale with its new plant in Bukit Raja (initial 50K capacity p.a.) to be fully completed and operational in 2019. Meanwhile, equipment division is expected to move forward into high value added manufacturing. To recap, UMW signed a 25+5 year contract with Rolls Royce to manufacture fan cases for Trent 1000 & 7000 engines, which used in Boeing 787 Dreamliner and Airbus A330neo. Rolls Royce plant in Serendah has been completed and is targeted to deliver first fan case in October 2017 and shall render profit to the Group from 2019 onwards.

Valuation & Recommendation

• Maintain HOLD call on UMW with a higher target price of RM5.20 (previous TP: RM4.00) as we believe the worst is over especially with the kitchen-sinking exercises in 4Q16, and fully divest its listed O&G by 1H17 and non-listed O&G by this year. Our valuation for UMW is now pegged at 20x FY2018F PE based on revised EPS of 26 sen.

Source: JF Apex Securities Research - 28 Feb 2017