Result

• UMW Holdings Berhad (UMW) posted a core net profit of RM109.2m during 2Q19 which soared 32.4% qoq but tumbled 7.6% yoy. Meanwhile, revenue stood at RM2.9b, which improved 6.9% qoq and 1.6% yoy. Subdued YoY earnings was due to one-off provision reversal recorded in previous year.

• As for 1H19, the Group recorded core net profit of RM191.6m, down 2.8% yoy. However, revenue was up 7.6% to RM5.7b, banking on better revenue from Automotive and Manufacturing & Engineering segments despite lower earnings from Equipment segment.

• Below expectations. The 6M19 core net profit of RM191.6m accounts for 43.7% of our and consensus full year net earnings forecast given the subdued performances in from Equipment segment.

Comment

• Stellar Automotive segment. Auto revenue increased 10.4% qoq and 0.2% yoy respectively, thanks to stellar Toyota and Perodua vehicles sales during this quarter. Domestic Toyota vehicles sales improved 27.8% qoq but dropped 7.9% yoy. Meanwhile, Perodua showed a flattish growth, which inched up 0.8% qoq but down 0.7% yoy. Besides, Auto PBT also grew higher, +21.6% qoq and +6.1% yoy as we believe it was aided by higher localization content for its new models (new Toyota Vios and Toyota Yaris) which boosted the Group’s margin as well as higher share profit from Perodua. The Group had introduced Toyota Vios, Toyota Yaris, Toyota CH-R update, Toyota Avanza facelift so far and expected to introduce CBU units from Thailand which is Toyota Corolla in 4Q19. On top of that, Perodua had also introduced Perodua Aruz during mid Jan’19 and has delivered c.17.9k units (as for 7M19). Overall, we believe Auto segment will continue to strengthen going forward as Bukit Raja Plant (BRP) almost hitting the production capacity of 50k units/year and easily double the capacity with minimal capex requirement. Besides, the Group is upgrading their Shah Alam plant (SAP) currently to cater for potential new models.

• Discouraging Equipment division. Equipment segment’s revenue tumbled 10.2% qoq and 6.1% yoy and PBT also dropped 15.9% qoq and 6.2% yoy during 2Q19. Discouraging performance was dented by dismal demand from Heavy Equipment products. Despite uninspiring result from this segment, the Group believes Equipment division will regain its momentum going forward, spurred by strong demand in heavy equipment business following resumption of few mega projects by the government coupled with higher product sales arising from expansion of overseas market.
• Bolstering M&E division. Manufacturing & Engineering’s revenue improved 3.1% qoq and 37.1% yoy. Meanwhile, M&E’s PBT soared 468.2% qoq to RM13.2m and turnaround from LBT of RM547k from a year ago. The stellar earnings were mainly buoyed by aerospace business, which delivered higher number of fan cases as well as improved margin. UMW expects aerospace business to increase its production within the time frame to meet the Rolls-Royce’s demand. The Group expects UMW Aerospace to be breakeven this year, and will begin production of Trent 7000 fan cases in 2020.

Earnings Outlook/Revision

• We cut our earnings forecast for FY19 and FY20 by 5.8% and 4.2% respectively to account for lower margin due to high depreciation cost from BRP.

Valuation & Recommendation

• Maintain BUY call on UMW with a lower target price of RM5.60 (RM6.10 previously) based on 16x FY2019F PE with revised EPS of 35 sen. Target P/E ratio assigned is below its 5-year historical average PE of 16.9x.

• We favour the stock as: 1) Auto division will continue to register robust growth following strong demand from Perodua, expansion of SAP and BRP which almost hits its production capacity which helps to further boost Toyota sales volume; 2) M&E division is expected to breakeven in this and move towards into high value-added manufacturing banking on aerospace venture; 3) Joint venture with Komatsu that will bolster its existing market share.

Source: JF Apex Securities Research - 28 Aug 2019