We came back from UMW’s FY17 analyst briefing with our cautious view unchanged. Key takeaways from the briefing includes: i) losses in O&G segments at RM519.6m dragged down the FY17 results, ii) Automotive and Equipment segments to boost products range for a better sales, and iii) UMW Aerospace breakeven point in FY19 with 160 fan cases expected to be delivered. Maintain MP with unchanged TP of RM6.25.

Re-look on FY17 results. The group FY17 revenue increased by 6% with all three core businesses registering higher revenue, however, mitigated by the lower contribution from the O&G segment. Subsequently, the group PBT was at RM252.9m as opposed to a LBT of RM242.5m in FY16.Taking a detailed look at the segments, Automotive (RM433.7m, -13% YoY) and Equipment (RM140.6m, -3% YoY) continued to be profitable, whereas M&E registered losses (-RM16.3m from PBT of RM24.6m in FY16). Excluding UMW aerospace preoperating losses (c.RM60m), M&E was also profitable (at RM44m). Meanwhile, demerger of UMW O&G Corp. was completed in June 2017, but still affected the FY17 results with net losses of c.RM156m. As a part of the exit strategy for the unlisted O&G segment, total impairment of RM654m was incurred in FY17 with the write-down on assets to fair value (RM286.3m), write-down on inventories (RM113.3m) and a charge on remeasured financial guarantee due to anticipated early settlement (RM254.0m) have kept the O&G segment at losses (LBT of RM519.6m from LBT of RM706.5m). On the other hand, forex losses at RM82.9m in the 1H17 impacted financials of Automotive Division due to its imports in USD. Excluding impairment, PBT was higher by 10% to RM506.9m from RM462.5m in FY16 in which we believed was due to the narrower losses in O&G segment with the elimination of losses from Oman operation’s cessation. Correspondingly, the group registered CNP of RM57.1m from CNL of RM497.1m. The group will continue focusing on 3 core segments with the planned total exit from the O&G segment (9 unlisted O&G companies remained to be disposed by end-2018).

Automotive and Equipment to boost products range. For Automotive segment, UMW Toyota expected to launch new car models to boost market share (2018 sales target at c.75k units) namely 2018 Toyota CHR (1Q18), 2018 Toyota Harrier (1Q18), face-lifted Toyota variants, and Lexus models (LS, RX350L & Lexus NX300 in 2H18) whereas, strengthening of MYR against USD would lead to better margins. On the other hand, Perodua’s contribution will continue to be sustainable with strong demand in entry level segment (2018 sales target at 209k) supported by the all-new Perodua MyVi and all-new Perodua SUV D38L (4Q18). For Equipment, the group will continue to leverage on partner’s (KOMATSU & TICO) strength to boost product range and market penetration, while, expanding value added services by providing total solutions services.

UMW Aerospace breakeven point in FY19. UMW Aerospace, under the M&E segment, is expected to trim its losses to c.RM20m level in FY18 (from losses of c.RM60m in FY17) before reaching breakeven level in FY19 with 160 fan cases level expected to be delivered considering that some front-loaded investments need to be amortised. UMW Aerospace has delivered 6 fan cases for FY17 and additionally, expects to ramp up its production to 80 fan cases for 2018 and 160 fan cases by 2019 before hitting full capacity of 250 fan cases by 2020.

Maintain MARKET PERFORM with an unchanged TP of RM6.25 based on 20x FY18E EPS implying +1.0 SD of its 5-year mean historical PER. We maintain our neutral stance on UMW in view of the limited growth in car sales pending the completion of its new Bukit Raja Plant (expected to be operational in 1Q19), gestation period for UMW Aerospace and elimination of losses in stages for the unlisted O&G companies until complete disposal targeted by end-2018. Risks to our call include: (i) higher-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 5 Mar 2018