What’s New

• Exit from oil and gas to boost earnings; focus on core business to unlock value of company

• Lift earnings by 26%/21% for FY17F/18F

• Maintain HOLD with TP of RM5.30

No pain, no gain

Earnings lift from oil and gas exit. We increase our FY17-18F earnings by 21%-26% after incorporating lower losses from the oil and gas segment, in view of its intention to exit this business by 1H17. We maintain our HOLD rating for UMW with an SOP- based TP of RM5.30. The group will see a lift in earnings once it completely exits the oil and gas business but the auto segment may continue to face pressures arising from weak consumer sentiment.

Impairments and provision to give a clean slate. In 4Q16, UMW has made an impairment and provision of RM2.2bn for both of its listed and non-listed oil and gas businesses. It plans to distribute its entire stakes in the listed unit to its shareholder by 3Q17 while the non-listed oil and gas assets will be disposed of progressively this year. Upon completion of this exercise, the longer term outlook for its future earnings would improve significantly.

Auto sales may still be muted in the near term. Toyota and Lexus’ sales volume came in at 65,110 units in FY16 (-32.1% y- o-y). We expect 1H17 sales to be muted as new launches will be rolled out in 2H17. This is coupled with the intense competition amid a more challenging economic environment and weak consumer sentiment. Perodua’s FY16 sales have also declined (- 2.91% y-o-y), and the associate’s contribution is not sufficient to offset lower earnings from Toyota.

Valuation

Maintain HOLD call. We maintain our HOLD rating for UMW with an SOP-derived TP of RM5.30. In our view, a recovery in Toyota profit would be a re-rating catalyst.

Key Risks to Our View

Sharp recovery in auto sales. Significantly stronger Toyota vehicle unit sales could revive earnings and re-rate the stock.

Source: Alliance Research - 1 Mar 2017