Result

• UMW Holdings Berhad (UMW) posted a core net loss of RM13.4m during 4Q19 which depleted 113.3% qoq and 126.5% yoy. Meanwhile, revenue stood at RM3.1b, which soared 8.1% qoq and 16.3% yoy.

• As for full year of 2019, the Group registered a core net profit of RM287.2m which dropped 22.4% yoy despite achieving marginally higher revenue, +3.9% yoy. The disappointing earnings were due to higher depreciation cost from Bukit Raja Plant (BRP) under Automotive segment coupled with subdued margin from Equipment segment. However, stellar revenue was spurred by robust car sales from Automotive division as well as higher fan cases delivery from Manufacturing & Engineering division.

• Below our expectations. 12M19 core net profit of RM287.2m were substantially below our in-house and market expectation which only account for 76% and 85.9% of full year earnings estimates respectively.

Comment

• Robust sales from Toyota and Perodua. Auto segment posted massive revenue which rose 6.7% qoq and 19.7% yoy. Stellar growth was propelled by massive vehicle sales from Toyota (+31.3% qoq and 64.5% yoy) as well as Perodua (+8.1% qoq and 4.1% yoy) which brings up full year vehicle sales for both car makers by 5.1% and 6.0% respectively. Nevertheless, PBT slid 18% qoq and 11.9% yoy, no thanks to lower share of profit from Perodua. Going forward, both Toyota and Perodua are expected to launch new SUV models coupled with some facelift or updated version, we believe. We reckon Auto segment to grow at healthy pace as BRP already hit the production capacity of 50k units/year with 80% utilization rate, easily double the capacity with minimal capex requirement, working on dual-shifts and higher localisation rate to (c.80%).

• Disappointing Equipment division. The Equipment segment’s revenue down 7.2% qoq and 17.5% yoy, no thanks to sluggish demand from both Industrial and Heavy equipment businesses. On the same note, PBT dropped 11.4% qoq and 19.5% yoy due to margin squeeze which led to PBT margin depleted by 0.4 ppts qoq and 0.2 ppts yoy respectively in view of slowdown in manufacturing, construction and logging activities. Overall, the Group expects the outlook for this division to remain challenging in the near term on the back of sluggish demand from manufacturing, mining and logging sectors from Heavy equipment business. However, the Group believes the Heavy equipment business will be underpinned by revival of few mega projects by Malaysian government and massive demand from Singapore and Papua New Guinea coupled with steady leasing and other value-added services in Vietnam under Industrial equipment business.

• Encouraging outlook for M&E division. Manufacturing & Engineering’s revenue jumped 30.2% qoq and 35.5% yoy. On the same note, PBT soared 95.3% qoq and 219.2% yoy. Steady performance was underpinned by higher number of cases deliver from its Aerospace business during the period as well strong demand for autocomponents products. The Group is currently ramping up their production within the time frame to meet the RollsRoyce’s demand and expects to breakeven in FY20. Besides, the business will also begin its production of Trent 7000 fan cases in FY20. Moreover, the Auto Components business is expected to remain steady throughout the year.

• Final dividend declared. The Group has declared a single-tier dividend of 2.5sen/share for FY19, which bring total dividend payout of 6.5sen/share for FY19.

Earnings Outlook/Revision

• We cut our earnings forecast for FY20 by 4.3% to account for lower margins due to high depreciation cost from Bukit Raja Plant (BRP) as well as lower vehicle sales volume. Besides, we also introduce our 2021F net earnings of RM438.4m, +6.4% growth yoy.

Valuation & Recommendation

• Maintained HOLD call on UMW with a lower target price of RM3.50 (RM4.80 previously) following our earnings cut. Our valuation is now based on 10x FY2020F PE with a revised EPS of 35 sen (37 sen previously). Target P/E ratio assigned is below -1 standard deviation of 5-year average PE of 13.1x.

• We are neutral on its outlook as: 1) Auto division is dampened by stiff competition from other car makers, stringent loan approval and weak sentiment towards big ticket items; 2) Higher depreciation cost from BRP; and 3) Fluctuation of foreign exchange.

Source: JF Apex Securities Research - 28 Feb 2020