• 3Q16 earnings missed consensus estimates

• Jack up rigs were hardly utilised

• Auto earnings flat despite improved Perodua contribution

• Maintain NEUTRAL at unchanged TP of RM5.30/share

3Q16 well behind consensus. UMW registered a core net loss of RM93m for its 3Q16, which brought 9M16 core net loss to RM119m. This is against our already bearish FY16F of a RM123m net loss and well behind consensus’ FY16F net profit of RM103m. Our forecasts are maintained for now as we expect 4Q16 core operating performance to improve but UMW is unlikely to meet consensus’ bullish profit forecast.

Auto division pretax profit was flat quarter-on-quarter despite a 54% increase in associate earnings (mainly driven by Perodua). Run out of end-of-life models i.e. Innova, Vios and Camry might have impacted UMW Toyota’s (UMWT) margins in 3Q16 but was compensated by better equity earnings from Perodua following launch of the Bezza model. The major facelifted Vios was launched in Oct16 but has yet to make an impact. UMWT sold an average 2K/month of the Vios in 3Q16 but Vios sales in Oct16 was just 1.5K units. The Sienta which was launched in Aug16 is a small volume generator i.e. ~600 in 3Q16 as it is a CBU priced at a premium to B-segment MPV peers. The new Innova and facelift Camry has yet to be launched and we suspect these might be pushed into FY17F as it is already close to year end.

O&G losses deepened. UMW’s jack-up rigs were largely unutilised in the quarter while Naga 1 (semi-submersible rig) was operational only up till August. Its contract with Petronas Carigali had expired and there is no indication from the client to exercise its 2-year extension option. Management indicated of potential asset impairments next quarter, while benefits from mobilisation of Naga 6 and Naga 8 for their new contracts with Carigali and Hess respectively (See Exhibit 3) in 4Q16 will be offset by Naga 1’s contract expiry. Naga 2 meanwhile will commence its contract with Ophir from 2Q17. South East Asian jack-up utilisation rate is stabilising at ~40% and rates at ~USD75K/day. UMWOG managed to squeeze in +ve operating cash flow in 3Q16. Part of its short-term debt has been restructured but there is still a remaining RM1.3b (vs. RM2.3b previously) in short-term debt vs. gross cash of RM908m, inclusive of RM308m loan from UMW.

Recommendation. Maintain NEUTRAL on UMW at unchanged TP of RM5.30/share. Share price has taken a beating in the past week and UMW is now trading at 0.9x FY17F BV.

Source: MIDF Research - 30 Nov 2016