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• 4Q16 net profit was below expectations

• Impacted by provisions and asset impairments for the oil and gas business

• Maintain HOLD with TP of RM5.30

Core earnings below expectations

• UMW recorded a net loss of RM1.6bn in 4Q16. Stripping off provisions and impairments (RM1.3bn), the group recorded a core net loss of RM283.2m in 4Q16. This brings FY16 core net loss to RM402m, which is below ours and consensus expectations.

Impacted by provisions

• Auto pretax profit came in at RM143.5m (+7.6% q-o-q; - 42.1% y-o-y). The better q-o-q numbers were backed by the year-end promotions and new launches (2016 Toyota Vios and all-new Toyota Innova) by Toyota. Toyota and Lexus sales volume increased by 11.5% q-o-q to 19,625 units. As for the lower y-o-y numbers, this was due to the intense competition and higher operating costs from the weakening ringgit.

• The oil and gas (listed) segment recorded a pre-tax loss that widened to RM918.1m in 4Q16 from RM133.0m in 3Q16, largely due to an asset impairment of RM780.2m. Excluding impairments, losses are at RM137.9m. Despite new tendering activities, the positive effects were only partially felt in 4Q16 as it takes time to translate tender activities into rig utilisation.

• As for the oil and gas (unlisted) segment, losses came in at RM625.6m in 4Q16 which includes an impairment of RM381.9m.

• The equipment segment recorded lower revenue (-17.9% y-o-y to RM330.8m) due to the slowdown in the construction and mining sectors and the restriction imposed on the importation of heavy equipment into the country by the government in Myanmar. However, profit before tax managed to improve to RM30.6m (+5.2% y-oy).

Outlook

Earnings lift from oil and gas exit

• Jan 17 numbers for auto sales were slightly higher than last year’s, with a total industry vehicle (TIV) of 44,667 units (+0.2% y-o-y). The volume for auto sales is expected to remain muted in the near term given the weak consumer sentiment and tough economic conditions. The Malaysian Automotive Association expects the TIV for FY17 to improve by 1.7% to 590,000 units.

• The new launches in 4Q16 such as the 2016 Toyota Vios, Toyota Innova, Toyota Corolla Altis facelift and Toyota Camry facelift may spill over into 1H17 and help sustain sales volume.

• As for the oil and gas segment, the group has proposed to exit completely from the oil and gas business and this will see a major lift in its earnings and improve its net gearing. The large amount of impairments made for the unlisted and listed oil and gas assets will also give the group a clean slate for FY17.

Proposed distribution via capital reduction instead

UMW has announced that they will be undertaking a capital reduction of about RM704.8m instead of its earlier planned bonus issue and redemption for a proposed distribution. The proposed distribution is expected to be completed by 3Q17.

Valuation

We maintain our HOLD rating for UMW with a TP of RM5.30 for now, pending its upcoming analyst briefing. There is a potential earnings revision of c.10% as we could bump up our earnings forecasts to factor in the removal of the oil and gas business.

Source: Alliance Research - 28 Feb 2017