Result

• UMW Holdings Berhad (UMW) registered a headline net profit of RM128.1m in 3Q18. After excluding the exceptional items such as impairment of receivables, property, plant and equipment (PPE) and in inventories, loss on sale on investment and derivatives, gain on disposal of property, plant and equipment and forex gain as well as PPE written off, the Group reported a core net profit of RM139.5m, which improved 18.1% qoq and 922% yoy. Meanwhile, revenue stood at RM3.3b, which elevated 12.7% qoq and 23.2% yoy.

• As for 9M18, the Group recorded a core net profit of RM336.7m as compared to a core net loss of RM59.7m in 9M17 amid improved revenue of 4.4% yoy.

• Above expectations. The 9M18 core net profit of RM336.7m accounted for 89.6% and 93.5% of our and consensus full year net earnings forecast respectively following the robust performance in core segments coupled with lower operating cost in M&E segment.

Comment

• Stellar Auto segment. Auto segments’ revenue soared again in this quarter, substantially rose 10.9% qoq and 24.9 yoy while PBT increased by 6.2% qoq and 42.6% yoy. Higher revenue was mainly propelled by higher car sales volume following new models launched within this year coupled with ‘zero-rated GST’ which took place from June’18 until Aug’18. Meanwhile, improved PBT was due to strengthening Ringgit against USD and JPY which led to rise in PBT margin by +0.7 ppts yoy. Domestic Toyota sales chalked up 10.4% qoq and 34.6% in 3Q18. However, Perodua car sales plunged 16.9% qoq and 1.5% yoy mainly due to supply disruption at one of its vendors which affected production of new Myvi. Perodua maintained its leading position among the car marques, with 37% market share in 9M18. Among models that had been introduced in this year such as new Toyota Harrier, new Toyota CH-R updated Toyota Alphard and Velfire, new Toyota Rush and Perodua Alza facelift. Looking forward, the Group expects to introduce few new models such as all-new Toyota Vios, Toyota Camry, Toyota Yaris and new SUV of Perodua.

• Equipment division at all-time high. Equipment segment’s revenue chalked up another impressive growth, +10.2% qoq and 9.2% yoy, thanks to higher export and increased demand in construction industry. Besides, segmental PBT also soared by 15.1% qoq and 10.8% yoy. The Group expects demand for heavy equipment in 2H18 to be tepid following review of mega projects domestically. However, performance of this division will be supported by current orders secured from construction sector coupled with rental business from industrial equipment segment.
• Turnaround in M&E division. Manufacturing & Engineering’s performance was getting better, posting a PBT of RM15.5m in 3Q18 as compared to LBT of RM5k and RM6.7m in the last quarter and a year ago respectively, amid higher revenue of 42.2% qoq and 62.7% yoy. The encouraging earnings were mainly underpinned by aerospace business, which started to generate revenue in 4Q17 as well as lower operating cost incurred to set up the fan cases. The Group expects aerospace business to increase its production within the time frame to meet the Rolls-Royce’s demand. Lubricant business wise, UMW hopes for market penetration into other ASEAN countries.
• Disposing its asset in Shah Alam. On a separate announcement, the Group announces to dispose of its leasehold industrial land in Shah Alam for RM288m which comprises 10 lots held, in total of 38.8 acres. The land will be sold to Strategic Sonata Sdn Bhd (SSSB, a wholly owned subsidiary of Mapletree Dextra Pte Ltd) and expected to be completed in 2Q19. This is to unlock and realise the value of its long-held assets in Shah Alam as part of the Group’s broader strategic thrust of sustainable value creation for shareholders. Besides, the Group plans to move current business operations in Shah Alam to the UMW High Value Manufacturing Park in Serendah as an effort to bring a new phase of growth to the business. Also, this is to enlarge the ecosystem for high-value, innovative manufacturing to the plant.

Earnings Outlook/Revision

• We revise upwards our core net profit forecasts for FY19F and FY20F by 17.8% and 18.5% to RM442.5m and RM503.5m respectively to reflect higher car sales volume and better margin.

• We expect the Group to re-focus on its three core businesses which will resume growth momentum over the medium to longer term. We favour the stock as: 1) Auto division is expected to register robust growth following new models come in and completion of new plant in Bukit Raja in 2019 (initial 50K capacity p.a.) which will further boost its Toyota sales volume; 2) M&E division is expected to move towards into high value-added manufacturing banking on aerospace venture; 3) Joint venture with Komatsu that will bolster its existing market share; 4) Exit of unlisted O&G segment by 2018 will help to improve the Group’s overall profitability.

• Maintain BUY call on UMW with a higher target price of RM6.88 (previously RM6.72) as we roll over our valuation to FY19F. Our fair value is based on 16x FY2019F PE which is close to its 3-year historical average PE of 17.3x.

Source: JF Apex Securities Research - 3 Dec 2018