Result

• UMW Holdings Berhad (UMW) posted a net loss of RM29.4m in 3Q17, narrowing from a net loss of RM209.3m in 2Q17 and net loss of RM128.8m a year ago. Meanwhile, the Group’s topline stood at RM2.7b, which was marginally down 4.1% q-o-q and 4.9% y-o-y.

• As for 9M17, the Group reported a net loss of RM218.5m as compared to a net loss of RM124.4m in 9M16. Meanwhile, revenue decreased by 5.2% y-o-y to RM8.3b. Overall, the Group recorded a net loss RM59.6m in 9M17 as compared to net loss of RM118.6m in 9M16.

• Below expectations – 9M17 results were below our expectation and market consensus. The shortfall was mainly due to lower-than-expected contribution from automotive segment as well as sluggish performance in unlisted Oil & Gas segment.

Comment

• Subdued Auto division in 9M17. Auto segment’s PBT in 9M17 recorded a decline of 16.4%, dented by higher USD against MYR. We also believe the intense competition from other car markers has led to drop in Toyota sales by 11.4% y-o-y in 3Q. However, on a q-o-q basis, auto’s PBT recorded an increase of 7.2% q-o-q as it was reinforced by strong demand for Toyota Innova and Toyota Fortuner and Toyota Hilux. Toyota still able to maintain its market share of 11.7% during 9M17. We reckon that Toyota sales will be robust in the near term as the Group will exert a massive effort on promotional activities towards end of the year coupled with launching of new Toyota CH-R in 1H18.

• New MYVI 2018 to bolster Perodua sales. Recently, Perodua has announced a third-generation of Myvi and it has been opened for booking from price range of RM44.3k to RM55.3k. We foresee the new launch will contribute to the Group towards 4Q17. As for 9M17 results, Perodua maintained its leading position with 35.6% market share and recorded a minimal growth of 0.5% y-o-y. We believe sales were driven by Axia facelift and updated Bezza which took place early this year.

• Lower margin weighed on Equipment division. The Equipment division for 9M17 (topline: +1.1%, bottomline: -4.4%) was affected by lower profit margin from industrial equipment business in Malaysia and Singapore. PBT margin decreased by -1.38ppts. On a quarterly comparison, both topline and bottomline increased by 5.1% and 21.9% respectively, propelled by higher construction activities that resulted in sterling performance

in equipment sales and product support segment.

• Narrowing losses from unlisted Oil & Gas (O&G).

Unlisted O&G narrowed its losses during 9M17, posting a loss before tax of RM191.9m as compared to RM265.5m in 9M16. The continued poor performance was due to weaker drilling activities as well as cessation of drilling business in Oman. Following ceased operations in its Oman business in April 2017, the Group is currently in the midst of negotiating to exit other business units. Besides that, on q o-q, the loss before tax also narrowed as lower losses incurred from its operations in China. The Group commits to sell off its unlisted O&G segment by 2018 and totally exit the sector. Looking forward, we foresee the Group’s earnings will recover with the disposals of its loss-making unlisted O&G segment.

• Slumbering M&E division. Manufacturing & Engineering’s PBT posted a net loss of RM13.2m in 9M17 as compared to a net profit of RM20m in 9M16. The disappointing performance posted by this segment was due to the aerospace business which is still at a pre operating phase. The Group expects to deliver its first unit of product in the next quarter. However, 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 respective 17.5% and 21.7% for FY17F and FY18F to account for lower margins for Auto division and 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 the longer term - 1) Auto division is expected to register a robust growth with the launch of new Toyota CH-R during the 1H18 coupled with strong marketing strategies in 4Q17; 2) M&E division is expected to move towards 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 in 2018 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 24.8x FY2018F PE based on revised EPS of 21 sen. Our target PE for valuation is above its historical mean PE as to better reflect the Group’s meaningful earnings recovery in 2018F.

Source: JF Apex Securities Research - 29 Nov 2017