9M17 core PATAMI of RM45.1m excluding impairment, came in below expectations compared to our/consensus forecasts of RM455.7m/RM195.3m. The negative deviations were due to the lower-than-expected margins in Automotive segment and wider losses in M&E and unlisted Oil & Gas division. Thus, we cut our earnings assumptions for FY17E/FY18E by 75%/30%. As such, we lowered our TP from RM5.77 to RM5.30. Reiterate MARKET PERFORM.

9M17 below expectations. The group reported 9M17 core PATAMI of RM45.1m excluding impairment (RM51.4m) which came in below expectations compared to our/consensus forecasts of RM455.7m/RM195.3m. The negative deviations were due to the lowerthan-expected margins in Automotive segment and wider losses in M&E and unlisted Oil & Gas division. No dividend was declared for the quarter, as expected.

YoY, 9M17 revenue increased by 7% due to higher contribution from the Auto segment (+10%), with improvement in volume of cars sold by 3% to 201,549 units as per MAA statistics, 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).The positive growth was also supported by the Equipment segment (+1%), with higher contract awards, the M&E segment (+6%), with higher sales of shock absorbers. This, however, was dampened by lower contribution in unlisted Oil & Gas segment (-32%), due to lower drilling activities and ceasing of operations in Oman. Despite the higher sales, PBT plunged by 40%, hampered by the higher import costs from unfavourable forex rates (as at 9M17, the USD/MYR at RM 4.3473/USD compared to RM4.0842/USD as at 9M16).

QoQ. 3Q17 revenue declined by 4% attributed to lower contribution from the Auto segment (-4%) due to lower demand in post-festivities (Hari Raya) period. This was cushioned by the higher contribution from other segments namely Equipment (+5%), M&E (+1%), and unlisted Oil & Gas segments (+19%) attributed to higher sales and contract awards. Nonetheless, the PBT returned to the black for the quarter at RM19.9m (2Q17:-RM11.2m) due to the improved contribution from all segments attributed to the stronger USD/MYR rates (as at 3Q17, the USD/MYR was at RM 4.2637/USD compared to RM4.3592/USD as at 2Q17).

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 new models (2018 Toyota CH-R, 2018 Toyota Harrier & thirdgeneration Perodua MyVi) 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 (201,549 units as of 9M17: at 74% of the target). Nonetheless, we maintain our neutral stance on UMW 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

Post-results, we cut our FY17E/FY18E earnings assumptions by 75%/30% to account for lower margin assumption for its lion’s share Automotive segment as well as wider losses in M&E segment as we were previously too optimistic with our numbers. Nonetheless, FY18 earnings growth is expected to benefit from the full divestment of unlisted Oil & Gas division.

Maintain MARKET PERFORM with a lower TP of RM5.30, based on revised 17.0x FY18E PER in line with 5 years average historical PER. We think our valuation is fair considering the expected improvement in all of its core segments with its Automotive segment TIV comprise almost half of the total Malaysian TIV volume (previously from, RM5.77, based on 13x FY18 PER). Risks to our call include: (i) higher-than-expected car sales volume, and (ii) higher-than-expected margins.

Source: Kenanga Research - 29 Nov 2017