• Returned to the black after a year of losses

• Though small, earnings were within expectations

• FY17F will be backloaded, prime beneficiary of Ringgit strength

• Reaffirm BUY at unchanged TP of RM6.50/share.

Back to the black. After almost a year of consecutive core net losses, UMW finally turned in a core net profit of RM20m in 1Q17, despite still consolidating the loss making O&G units. While small relative to our FY17F, the earnings were within expectations. From 2Q17, earnings should improve quite significantly from the absence of UMWOG losses in 2H and further improvement in auto earnings against the seasonally weak and peak USD in 1Q.

Auto earnings improved. Autos registered a 5%yoy earnings growth driven by improved Toyota and Perodua TIV. Earnings would have been much stronger if not for the strong USD in 1Q17. Auto revenue actually grew by some 40%yoy in 1Q17 but bottomline was dragged by a 10%yoy strengthening of the USD to RM4.45 – every 1% change impacts earnings by 6.5% on annualised basis, on our estimate. This was however partly mitigated by duty savings from newly qualified EEV models e.g. the Vios, Innova and Fortuner. We expect forex pressure to ease quite significantly in 2Q17 judging by spot trends. Secondly, 1Q is typically the weakest quarter for autos (post 4Q campaigns and being a short quarter) and typically accounts for just 16% of full year TIV and 16%-18% of full year earnings. We also suspect tax rate was inflated (>30%) for UMW Toyota in 1Q17.

Non-listed O&G losses shrunk. Losses from non-listed O&G units shrunk by more than two thirds year-on-year as a result of lower depreciation (post-impairments in 4Q16), lower operating losses as operations were scaled down and improvements in China operations (pipe manufacturing). The group targets to totally exit its O&G businesses by FY18F and may involve piecemeal asset sale. For the listed O&G units, losses could narrow as jack up rig utilisation should more than double in 2Q17 as new contracts come into play.

FY17F earnings to be backloaded. As we had highlighted before, FY17F earnings will be back loaded given: (1) Absence of UMWOG losses in 2H17 (2) Peak USD in 1Q17 (3) Seasonally stronger volumes in 2H, especially 4Q which historically accounts for 30%-35% of full year TIV (4) New launches in 2H17. Our earnings forecasts are unchanged

Reaffirm contrarian BUY at unchanged TP of RM6.50/share. (1) Demerger of O&G units will deleverage balance sheet, drive earnings turnaround and allow better focus on core divisions (2) Reversal of prior years’ market share loss given UMW Toyota’s renewed focus on EEV models which will drive structural cost reduction and price advantage (3) More than quadrupling of M&E division earnings once its aerospace division reaches full scale production (4) UMW is underowned and at just 12x FY18F earnings, trades below its historical average PER of 13.5x. (5) An attractive 11% dividend yield if investors were to realise the value of UMWOG shares to be redistributed to UMW’s shareholders by Jul17 (6) Improved balance sheet post UMWOG demerger positions UMW well for acquisitive growth.

Source: MIDF Research - 24 May 2017