FY16 core LATAMI of RM362.2m (-252.2% YoY) excluding the impairment came in below expectations at 50%/18% of our/consensus estimates. Negative deviation was largely in part due to greater losses in the O&G segment. No dividend declared, as expected. Downgrade to UNDERPERFORM with a lower TP of RM4.68 on an applied 12.0x PER to our FY17E EPS, where earnings are exclusive from O&G segment earnings. As per revised proposal, the proposed distribution of UMW O&G share will now be exercised via a reduction of UMWH share capital (refer to overleaf).

FY16 results were below expectations, as the group reported a FY16 core LATAMI of RM362.2m (-252.2% YoY) excluding the impairment (valued at RM1,328.4m) at 50%/18% of our/consensus estimates. Negative deviations were mainly due to significantly higher losses arising from the oil & gas segment from lower rig utilisation rates as well as highly competitive charter rates alongside steep overhead costs.

YoY, FY16 revenue fell by 24.1% due to weakness across all segments. The auto segment saw a decline in total sales (-21.0%) as consumer demand for automobiles was undermined by poor sentiment from higher living costs. Sales in the equipment segment fell by 26.6% amidst slowing construction and mining activities in Myanmar due to state government restrictions. Meanwhile, the Oil & Gas segment (-53.6%) continued to slump as industry activity was dampened by the lower rig utilisation. In terms of PBT, the Auto segment (-42.5%) was dragged down further due to higher import costs from unfavourable forex rates. The Oil & Gas segment (-417.8%) continued to be deeply affected by high overhead costs resulting from low operational efficiency from low rig utilisation. The underlying factors above led FY16 LBT to record at RM2178.7m (- 908.0%).

QoQ. 4Q16 revenue grew at 7.2% to RM3,062.3m with better sales across the segment. The Auto segment grew by 8.8% as recent model launches (i.e. Alphard, Vellfire and face-lifted variants of the Camry, Innova, Corolla Altis and Vios) have reinvigorated market demand. Revenue from the Oil & Gas segment (+142.7%) saw increased tendering activities in the upstream space as 2 of the 7 jack-up rigs were income generating. Ultimately, the LBT decreased by 1,645.5% to RM2,123.0m primarily as a result of the widening operating losses incurred by the Oil & Gas segment.

On the Auto Segment, management reduce their combined sales estimate for both Perodua and UMW to 272k units, broadly in line with our sales volume assumptions for FY17. We expect FY17 to only benefit from the spilling over of new launches from FY16 as there are less launches planned ahead. Furthermore, margins are expected to continue to be thin given the prevailing unfavourable forex. On the Oil & Gas segment, we continue to anticipate weakness in the short to medium term judging by the softness and uncertainty in oil prices seen recently. As such, the planned demerger of the Oil & Gas segment is expected to mark the end of widening losses incurred by the UMWH.

Post-results, We reduce our FY17E earnings assumption by 11.3% to RM455.8m on expectation of lower auto sales volume and carry-over of O&G losses expected to incur in first half of the year as the major part of the planned demerger of Oil & Gas segment only starts on April 2017. In the meantime, we introduce FY18E earnings assumptions of RM518.6m

Downgrade to UNDERPERFORM (from MARKET PERFORM) with a lower TP of RM4.68 (from RM5.28, previously) on an applied 12.0x PER to our FY17E EPS, where earnings are exclusive from O&G segment earnings, which was valued at 0.5x PBV separately.

Source: Kenanga Research - 28 Feb 2017