1Q17 core PATAMI of RM17.0m excluding impairment appear to be below our/consensus PATAMI estimates of RM455.7m/RM227.0m, however, we consider the results to be within expectation as we expect a much stronger 2H due to the elimination of losses in Oil & Gas segment following the demerger of UMW Oil & Gas. No dividend was declared as expected. No changes in earnings assumption. As such, we keep our TP unchanged at RM5.77. Upgrade to MARKET PERFORM (from UNDERPERFORM) as the share price has fallen within our target price range.

Within Expectation. The group reported a 1Q17 core PATAMI of RM17.0m excluding the impairment (at RM3.1m) appear to be below our/consensus PATAMI estimates of RM455.7m/RM227.0m, however, we consider the results to be within expectation as we expect a much stronger 2H due to the elimination of losses in Oil & Gas segment following the demerger of UMW Oil & Gas. No dividend was declared as expected.

YoY, 1Q17 revenue surged by 27.5% due to higher contribution from the Auto segment, as well as positive contribution from the other segments. The Auto segment (+40.8%), saw improvement in numbers of car sold by 16.1% to 66,959 units, from the spill-over of car deliveries sold in 4Q16. Additionally, the O&G segment (+26.1%), saw increased tendering activities as 3 of the 7 jack-up rigs were income generating. Meanwhile, the M&E segment (+14.1%), saw higher sales of shock absorbers. In terms of PBT, despite the higher sales, the Auto segment (+5.2%) was still hampered by the higher import costs from unfavourable forex rates, while the O&G segment (- 75.3%) continued to be deeply affected by high overhead costs resulting from low operational efficiency from low rig utilisation. The underlying factors above led 1Q17 PBT to decline by 31.7%

QoQ. 1Q17 revenue declined by 8.4% due to higher sales base from the Auto segment and O&G segment in previous quarter. The Auto segment declined by 11.0%, following the aggressive year-end promotion in previous quarter, on top of higher deliveries for the new model launches (i.e. Alphard, Vellfire and face-lifted variants of the Camry, Innova, Corolla Altis and Vios). Meanwhile, revenue from the Oil & Gas segments declined by 8.3% due to softer charter rate, even with the assets utilization rate is improving. Nonetheless, PBT was higher at RM14.4m compared to 4Q16 LBT of RM2.123m which was dragged down by provisions for impairment of assets as well as forex losses resulting from weakness of MYR against USD.

Outlook. The outlook for 2H17 looks promising with the strategic exit from the O&G industry improving the group’s profitability with more solid balance sheet. Furthermore, the anticipated new models (Toyota CH-R, Toyota Vios 2017 & Toyota Hilux 2.4G Limited Edition) for 2H17 should excite consumers’ sentiment bringing in more sales volume to the group. Overall, we expect the group to make a comeback with its three core segments delivering positive results moving forward. Recently, at the group EGM, shareholders have granted the approval to proceed with the demerger of UMW-OG. The demerger is expected to be finalized by July 2017. No changes in earnings assumption as we expect a much stronger 2H due to the elimination of losses in Oil & Gas segment. As such, we keep our TP unchanged at RM5.77 based on 13.0x PER to our FY18E EPS, where earnings are exclusive from O&G segment. We upgrade our call to MARKET PERFORM from UNDERPERFORM as the share price has fallen within the range of our target price.

Source: Kenanga Research - 24 May 2017