1H17 core PATAMI of RM27.0m excluding impairment, appears to be below our/consensus PATAMI estimates of RM455.7m/RM261.8m; 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 (in July 2017). No changes in earnings assumption. Maintain MARKET PERFORM with unchanged TP of RM5.77.

1H17 deemed to be within expectation. The group reported a 1H17 core PATAMI of RM27.0m excluding the impairment (RM2.8m), appear to be below our/consensus PATAMI estimates of RM455.7m/RM261.8m; 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 (in July 2017). No dividend was declared as expected.

YoY, 1H17 revenue increased by 15% due to higher contribution from the Auto segment (+19%), with improvement in numbers of cars sold by 7% to 133,589 units, with higher deliveries for the existing and face lifted variants models (i.e. of Perodua Axia, Myvi, Bezza and Toyota face-lifted variants of the Camry, Innova, Corolla Altis and Vios) and supported by the M&E segment (+6%), with higher sales of shock absorbers. However, mitigated by the Equipment segment (-2%) which was affected by intense competition and the O&G segment (-10%), which experienced softer charter rate even with the increased tendering activities (5 of the 7 jack-up rigs were income-generating). Meanwhile, in terms of PBT, despite the higher sales, the Auto segment (-14%) was still hampered by the higher import costs from unfavourable forex rates, while the O&G segment (-73%) continued to be deeply affected by high overhead costs resulting from low operational efficiency from low rig utilisation. The underlying factors above led 1H17 PBT to decline by 46%

QoQ. 2Q17 revenue slightly declined by 1% due to lower contribution from M&E segment (-7%), cushioned by higher contribution from other segments. The Auto segment increased by 3%, due to surge in demand for Innova and Fortuner. Meanwhile, revenue from the Oil & Gas segments increased by 55% with the assets utilization rate improving at 68%. Nonetheless, the earnings before tax sunk into the red with LBT of RM11.2m compared to 1Q17 PBT of RM14.4m which was dragged down by provisions for impairment of assets as well as forex losses resulting from weakness of MYR against USD.

Outlook. The strategic exit from the O&G industry is expected to improve the group’s profitability with more solid balance sheet. Additionally, the anticipated upcoming new models (Toyota CH-R, Toyota Vios 2017 & Toyota Hilux 2.4G Limited Edition) should excite consumers, bringing in more sales volume to the group. The group is on track to meet the targeted 272,000 units in FY17 (133,589 units as of 1H17: at 49% of the target). Nonetheless, we maintain our neutral stance on UMWH in view of the single-digit growth in its automotive segment sales volume pending the completion in its new Bukit Raja Plant (expected to be operational in early 2019) and the gestation period for its Rolls-Royce plant. No changes in earnings assumption as we expect a much stronger 2H due to the elimination of losses in Oil & Gas segment following the demerger of UMW Oil & Gas (in July 2017). Maintain MARKET PERFORM with unchanged TP RM5.77, based on 13.0x PER to our FY18E EPS, where earnings are excluding from O&G segment.

Source: Kenanga Research - 29 Aug 2017