Result

• UMW Holdings Berhad (UMW) failed to sustain its positive momentum by posting a net loss of RM 209.3m in 2Q17 as compared to net profit of RM20.2m in 1Q17, while widened from a net loss of RM12.1m a year ago. For the core net profit, the Group broadened their losses with RM15m vs RM4m in previous quarter. Meanwhile, the Group’s topline stood at RM2.7b, which was marginally down 0.6% q-o-q and 2.2% y-o-y.

• As for 1H17, the Group reported a net loss of RM189.1m as compared to a net profit of RM4.5m in 1H16. Meanwhile, revenue plunged by 10.8% y-o-y to RM5b

• Below expectations – 1H17 net earnings were below our expectations and market consensus. The sluggish result was mainly due to its listed and unlisted Oil & Gas segments as well as demerger costs of UMW Oil & Gas Corporation Berhad (UMW O&G).

Comment

• Silver lining for Auto division. Auto division’s 1H17 PBT recorded a decline of 13.9%, caused by higher USD against MYR, as well as intense industry competition. Even though USD softened against MYR in recent times, we believe the Group had implemented the currency hedging to avoid further losses from strong Dollar. Besides that, the intense competition from other car markers especially national brand led to drop in this segment by 25.8% y-o-y. However, on q-o-q comparison, Auto’s PBT managed to record an increase of 13.7% q-o-q as it was aided by strong demand from Toyota Innova and Toyota Fortuner. Toyota sales jumped significantly by 4.4% q-o-q with 10.6% market share in 1H17. As to achieve their target sales of 70k, the Group is expected to release four new facelift in 2H17, i.e. Vios, Camry, Fortuner and Hilux, as well as most awaited new model, Toyota CH-R.

• Perodua maintained its pole position. Perodua maintained its leading position with 35.4% market share, recording an increase of 2.4% y-o-y in 2Q17. We believe this was aided by launch of Axia facelift as well as updated version of Bezza which took place in 1H17. In addition, new model of Myvi is expected to be launched in 2H17, further cementing the Perodua sales. However, on q-o-q basis, Perodua sales recorded a small drop of 1.75, dented by shorter working months for the quarter.

• Equipment division still shaky. The equipment division recorded a decline for both its 1H17 topline and bottomline by 2.2% y-o-y and 13.1% y-o-y, no thanks to sluggish demand for heavy equipment amid competitive operating environment. Besides that, operation in Singapore also recorded a feeble growth as it was dented by reduced tax benefits under Productivity and Innovation Credit Scheme, beginning August 2016. Meanwhile, we understand that demand from Myammar was in disruption as the government banned on equipment import for jade mining. The sales for the segment are currently underpinned by mega construction projects in Malaysia.
   
• On a strategic exit from O&G sector – Another contraction recorded by listed Oil & Gas segment in 1H17 after recording a pre-tax loss of RM156.3m from a PBT of RM132.4m in 1H16. The continued lackluster performance was due to lower charter rates from new drilling contracts secured coupled with soft demand for the oilfield services. Moreover, the reduction of operating and capital expenditure from oil majors remained a downside risk for its O&G division. During the quarter, we also witnessed the massive impact from demerger costs of UMW O&G. As a result, the Group recorded a net loss of RM126.9m thus leading to overall widening 1H17 PBT net loss of RM189.1m. For PBT losses stemming from the non-listed O&G, it was incurred by redundancy expenses on cessation of drilling operations in Oman. The Group has demerged with UMW O&G in July 2017 with the completion of the distribution and share capital reduction. Subsequently, the Group targets to dispose all of its non-listed O&G assets by end 2018 and exit totally from the O&G sector.
   
• M&E division shrank to the red. Manufacturing & Engineering’s PBT posted a net loss of RM6.5m in 1H17 as compared to net profit of RM17.5m in last quarter. The dismal performance posted by this segment was due to the aerospace business which is still at set-up phase and yet to generate any revenue. The Group targets to deliver single digit unit in 2017, double digit units in 2018 and triple digit unit in 2019. The meaningful contribution from aerospace business to M&E division is expected to be felt from 2019 onwards.

Earnings Outlook/Revision

• We slash our net earnings forecasts by 3.3% and 4.1% for FY17F and FY18F to account for lower margins for M&E division as well as losses from unlisted O&G.

• We expect the Group to re-focus on three core businesses which will resume positive growth momentum over a longer term - 1) Auto division is expected to register modest growth with the launch of new models during the 2H17; 2) M&E division is expected to move forward into high value added manufacturing; 3) New plant in Bukit Raja (initial 50K capacity p.a.) to be fully completed and operational in 2019; and 4) Exit of O&G segment that will help to improve the Group’s overall profitability.

• However, we reckon that this year is still full of challenges for the Group especially for its core business, auto division, as impacted by weaker consumer sentiment towards big-ticket items and volatility in foreign exchange. Also, the non-listed O&G assets will continue to weigh on the Group.

• Maintain HOLD call on UMW with an unchanged target price of RM5.20. Our valuation for UMW is pegged at 20x FY2018F PE based on revised EPS of 26 sen. Our target PE valuation is near mean PE of 22x.

Source: JF Apex Securities Research - 29 Aug 2017