FY19 core PATAMI of RM255m (-23%) came in below both our/consensus expectations at 68%/76% of full-year estimates due to lower-than-expected automotive and equipment segments’ profit contributions. As such, we cut FY20E core PATAMI by 40% and our TP to RM3.25 (from RM5.45) based on unchanged 14x FY20E EPS (at -1.0SD of its 5-year historical mean PER). Downgrade to MP (from OP).

FY19 below expectations. FY19 core PATAMI of RM255m (-23%) came in below both our/consensus expectations at 68%/76% of full-year estimates due to lower-than-expected automotive and equipment segments’ profit contributions. Final DPS of 2.0sen was declared for the quarter, bringing FY19 DPS to 6.0sen (FY18: 7.5sen), below our 7.5sen estimate. Note that, FY19 core PATAMI exclude: (i) one-off Shah Alam land disposal gain of RM188.1m (recognized in 4QFY19), and (ii) other impairment of RM11.3m.

YoY, FY19 core PATAMI plunged 23%, no thanks to: (i) weaker equipment segment profit contribution (-15%) following a slowdown in construction, manufacturing, mining and logging activities in countries that the segment operates in, and (ii) lower Automotive segment’s profit contribution (-4%) despite higher UMW Toyota Motor sales at 70,009 units (+7% YoY), due to higher depreciation from the new Bukit Raja Plant (+70%). The decline was despite: (i) higher associate and jointventure company contribution (+8%), especially from 38%-owned Perodua, which recorded better sales of 240,284 units (+6%), (ii) higher M&E segment profit contribution (+183%), due to the ramping up of fan case production by Aerospace sub-segment which has turned profitable, and (iii) lower effective tax rate of 14.4% (FY18: 15.5%).

QoQ. 4QFY19 core PATAMI plunged 57% suffering from: (i) lower Automotive segment profit contribution (-18%), mainly from lower associate and joint-venture company (-24%), especially from 38%-owned Perodua, despite recording higher unit sales of 61,587 (+8%) mainly due to higher year-end discounts and the phasing out of older models of Perodua Bezza as well as from higher Plant depreciation with the upgrading works for a newer model line, which more than offset stronger UMW Toyota Motor’s sales of 21,483 units (+31%), and (ii) weaker equipment segment (-11%) in a challenging market for both Heavy and Industrial Equipment businesses.These was however cushioned by: (i) higher M&E segment profit contribution (+95%), due to the ramping up of fan case production by Aerospace sub-segment, and (iii) lower effective tax rate of 7% (3QFY19: 14%).

Outlook. We are cautious on its Automotive segment with its high level of Plant depreciation and stiff competition from local carmakers with UMW missing its 2019 target of 72k units and expecting lower sales for 2020 at 66k units (-6%). For Equipment division, the group will continue to leverage on its partners (KOMATSU & TICO)’s strengths, while UMW Aerospace has turned profitable in 2019. Elsewhere, 38%-owned Perodua is conservatively targeting flat 2020 sales of 240k units. Perodua planned to double investment spending to RM1.06bn for plant modernisation, building expansion and new model line platform.

We cut FY20E core PATAMI by 40% to reflect lower-than-expected automotive and equipment segment profit contribution

Downgrade to MP (from OP), with a lower TP of RM3.25 (from RM5.45) based on unchanged 14x FY20E EPS (at -1.0SD of its 5-year historical mean PER). Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 28 Feb 2020