Result

• UMW Holdings Berhad (UMW) posted a core net profit of RM86.6m during 3Q20, rebounding from a core net loss of RM79.8m in the previous quarter but dropped 14.4% yoy from a year ago. Besides, revenue soared 74.1% qoq but depleted 7.7% yoy to RM2.7b.

• As for 9M20, the Group registered a core net profit of RM37.8m which deteriorated 86.2% yoy on the back of disappointing revenue, -26.9% yoy.

• Below expectations. 9M20 core net profit of RM37.8m was below our in-house/market expectation, only accounting for 27.9%/27.1% of full year earnings estimates. The discouraging result was dented by disappointing earnings from Auto and Equipment segment amid stellar earnings from M&E segment.

Comment

• Soothing MCO lifted Auto segment on a quarterly basis; however, yearly performance remained sluggish. Auto division’s revenue jumped 93.1% qoq but down 7.4% yoy. Massive turnaround in quarterly revenue arising from re-opening of business operation during recovery movement control order (RMCO) period. Also, it was spurred by sales tax exemption initiated by the government. Domestic Toyota car sales were boosted by 140.4% qoq while Perodua car sales were elevated by 142.7% qoq. Besides, Auto’s PBT margin surged 10ppts qoq and 0.1ppts yoy in view of better contribution from its associate, Perodua. For the next quarter, we reckon that Auto segment to register massive growth buoyed by its stronger domestic Toyota and Perodua car sales given sales tax exemption, massive campaign and promotional activities to clear up inventories as well as launching of Toyota Yaris and Toyota Vios facelift in Dec’20. Additionally, UMW intends to introduce few new CBU and CKD models, lining up for 2021, including new Perodua SUV, probably in early next year.

• Better yoy of Equipment PBT margin despite sluggish revenue; YTD performance heavily affected by slower business activities. Equipment division rebounded qoq as revenue and PBT surged 27.3% qoq and 21.9% qoq respectively during RMCO. Nevertheless, PBT margin up by 1.4ppts yoy given better cost control as well as improved margin in leasing business despite lower revenue (-16% yoy). Besides, 9M20 revenue and PBT slumped 24.1% yoy and 25.8% yoy respectively, no thanks to slower activities in construction, manufacturing, mining and logging due to pandemic lockdown. Going forward, the Group expects Heavy Equipment sub-segment remains subdued amid shaky economic conditions. However, UMW believes that improving demand in the mining and construction sectors in its overseas operations could offset the negative impact. Besides, demand under Industrial Equipment sub-segment is expected to be steady, buoyed by recovery in few sectors such as manufacturing, logistics & warehousing and F&B.

• Sturdy cost control spurred M&E’s PBT margin despite slump in revenue. Manufacturing & Engineering’s rebounded qoq as revenue and PBT registered massive growth of 32.1% qoq and 153.4% qoq respectively. As for 9M20, M&E segment posted a stellar margin, up 1.5ppts yoy in view of better cost optimisation such as reduction in overhead cost. Nevertheless, revenue tumbled 8.2% yoy, no thanks to lower contribution from Auto Components and Lubricants sub-segments pursuant to MCO. For Aerospace business, the Group has successfully delivered Trent 7000 fan case in Oct’20. Looking forward, UMW expects the number of orders for fan cases to be lower due to tepid demand. Auto components & lubricants wise, the business is expected to be benefited from sales exemption tax given rising demand in OEM and REM markets. Also, lubricants sub-segment will continue to leverage on its OEM partners as well as strengthening its domestic and overseas sales.

Earnings Outlook/Revision

• We cut our earnings forecast for FY20F and FY21F by 24% and 2.2% respectively in view of moderate car sales volume as partly impacted by Covid-19 pandemic a well as margin erosion.

Valuation & Recommendation

• Maintain HOLD call on UMW with a lower target price of RM2.38 (RM2.40 previously) following our earnings cut. Our valuation is now based on 14x FY21F PE with an EPS of 17 sen (18 sen previously). Target P/E ratio assigned is slightly higher than its 5-year average PE of 13.8 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 - 26 Nov 2020