• Disposes 70% stake in UMW Fabritech

• In-line with strategic exit from O&G sector by end-FY18F

• Earnings recovery gaining traction

• Reaffirm contrarian BUY at unchanged TP of RM7.20/share.

Non-listed-O&G asset disposal well in progress. UMW has entered into a share sale agreement to dispose of its 70% stake in UMW Fabritech Sdn Bhd to DKLS Luxuria Sdn Bhd for RM18m. UMW Fabritech is involved in providing sandblasting, priming, coating, inspection, maintenance and repair services to the O&G industry. The move to dispose of UMW Fabritech is in line with group’s strategic plan to exit investments in the O&G sector. UMW aims to fully dispose its non-listed O&G units by end FY18F, after relinquishing its 56% stake in listed UMWOG back in July 2017. The RM18m (or 1.5sen/share) proceed is <1% of group’s gross cash, but is a positive development nonetheless.

O&G losses shrinking. UMW has prudently taken massive impairments for its O&G investments amounting to a total RM1.3b last year, in-line with its intent to exit the sector. Post-impairments, core losses from the non-listed O&G units have shrunk by more than two thirds to ~RM10m/quarter. UMW Fabritech specifically, was making losses of RM2m/annum, ~5% of total losses posted by the non-listed O&G units. Meanwhile, UMW should cease to consolidate losses from listed UMWOG from July 2017 onwards. UMW’s progressive exit from the O&G industry should act as strong share price catalysts in the next 12 months.

Progressive exit in next 12 months. Altogether there are 16 assets to exit within 4 different segments (See Exhibit 1): (1) Drilling & exploration – this is mainly in Oman and the group has already ceased operations and in active negotiations to dispose of the 7 land rigs it owns. These have also been written down substantially while the one –off cost for ceasing operations e.g. retrenchments and inventory write-offs of RM55m in total was booked in 2Q17. The remaining 2 assets in this segment are actually profitable. (2) OCTG & Line Pipe – offers have been received for the Indian unit and group is in active negotiations to dispose of another 2 units. 2 more assets are targeted for disposal by end FY18F. (3) Fabrication – Offers have been received and is in final negotiations. Targeted to complete soon. (4) Trading & oilfield services – this is a very small segment.

Strong 2H17 recovery intact. As we had alluded to, UMW’s FY17F earnings is backloaded and the catalysts for earnings to improve in 2H17 is falling into place: (1) A much stronger Ringgit against the USD (2) Launch of four new facelifts in Sep17 (3) Elimination of UMWOG (listed co) losses which stood at RM86m in 1H17. (4) Launch of new MyVi in 4Q17 (5) Progressive exit from non-listed O&G investments to gradually reduce non-listed O&G losses. Meanwhile, the gradual monetisation of UMW’s massive Serendah land which will kickstart soon and progress in disposing the non-listed O&G units should also act as strong share price catalysts in the near-term.

Reaffirm contrarian BUY at unchanged TP of RM7.20/share. Key catalysts: (1) Demerger of O&G units deleverages balance sheet, drives UMW back into the black and allows better focus on core divisions (2) Reversal of prior years’ market share loss, structural cost reduction and pricing advantage from UMW Toyota’s EEV-focused strategy (3) Monetisation of UMW’s 711 acres Serendah land which will unlock value of the asset – easily worth 40sen/share on our estimates, or 6% of our SOP value (4) A more than quadrupling of M&E division earnings once the aerospace division reaches full scale production

Source: MIDF Research - 6 Oct 2017