Result

• UMW Holdings Berhad (UMW) recorded a core net loss of RM79.8m during 2Q20 as compared to a core net profit of RM 31m in the previous quarter and RM89.3m same period a year ago. Besides, revenue stood at RM1.5b, which deteriorated 27.8% qoq and 48.5% yoy.

• As for 1H20, the Group registered a core net loss of RM48.8m compared with a core net profit of RM172.5m. On the same note, revenue depleted 36.6% yoy to RM3.6b.

• Results miss estimates. 6M20 core net loss of RM48.8m was substantially below our in-house and market expectation of full year earnings estimates. The sluggish result was dented by disappointing earnings from Auto and Equipment segment despite improved earnings from M&E segment.

Comment

• Subdued Toyota and Perodua sales during MCO. Auto division’s registered a loss before tax (LBT) of RM41.7m during 2Q20 (vs PBT of RM53.7m and RM151.1m in the last quarter and same period of last year) amid sluggish revenue which down 30.5% qoq and 53.8% yoy. Moreover both revenue and PBT during 1H20 slumped 95.6% yoy and 40.9% yoy respectively, no thanks to lockdown during MCO period. Car sales were heavily affected after closure of business operation for almost two months (only started operation on 12th May) in which domestic Toyota and Perodua sales diminished 41.8% yoy and 39.1% yoy respectively during 1H20. The Group has launched all-new Toyota RAV4 on June’20 and has started to take order for upcoming two new CKD models, which will be held for its official launch in early next year. For 2H20, we expect sales for both car makers to recover, underpinned by sales tax exemption. However, we reckon that overall Auto’s performance for FY20 will be moderated as affected by COVID-19 pandemic.
• Lesser industrial activities and MCO impact weighed down Equipment division. Equipment PBT down 4.4% qoq and 30.5% yoy on the back of lukewarm revenue, down 19.3% qoq and 32.1% yoy. Besides, 1H20’s PBT and revenue soothed 35.1% yoy and 28.1% yoy respectively. Massive contraction during 1H20 was dented by slower industrial activities such as construction, manufacturing, mining and logging activities which led to lower demand for heavy and industrial equipment. Looking forward, UMW intends to adopt cost reduction measures, introduce new products line-up as well as collaboration with principals through marketing programs to lift overall division’s performance.
• Lower cost incurred lifted M&E’s PBT margin during 1H20 despite disappointing revenue. Manufacturing & Engineering’s revenue down 26.2% qoq and 25% yoy amid slower PBT which slid 23.4% qoq and 39.3% yoy. However, PBT margin during 1H20 soared 18.9% yoy despite sluggish revenue of 10.3% yoy. Better earnings were spurred by lower operating cost from Aerospace business arising from cost optimization efforts. However, revenue was further bogged down by Auto components & lubricants business in tandem with decline in auto sales. Currently, Aerospace business is running 24/7 to deliver outstanding orders to Rolls-Royce. Management reckon that number of deliveries will be slightly lower than prior year as impacted by the pandemic. For Auto component business, UMW expects rising demand from OEM and REM markets and hence increasing its efficiency and capacity after completion of KYB-UMW plant expansion in 4Q20.

Earnings Outlook/Revision

• We cut our earnings forecast for FY20F and FY21F by 12.7% and 6.5% respectively in view of subdued car sales volume due to Covid-19 pandemic a well as eroded margins.

Valuation & Recommendation

• Maintain HOLD call on UMW with a lower target price of RM2.40 (RM2.45 previously) following our earnings cut. We roll over our valuation to FY21F, based on 13.3x FY21F PE with an EPS of 18 sen. Target P/E ratio assigned is slightly below its 5-year average PE of 14.1 x.

• We are neutral on its outlook as: 1) Auto division is dampened by stiff competition from other car makers; 2) Stringent loan approval and weak sentiment towards big ticket items amid Covid-19 pandemic; 3) Higher depreciation cost from Bukit Raja Plant; and 4) Fluctuation of foreign exchange (RM against Yen and USD).

Source: JF Apex Securities Research - 28 Aug 2020