• 3Q17 earnings disappointed
• Exceptionals deterred what would have been a sequential doubling in earnings

• Thesis on structural improvement at UMW autos intact despite earnings revisions

• Maintain BUY at revised TP of RM6.00/share

3Q17 missed estimates. UMW’s 3Q17 core net earnings of RM27m was disappointing. The group’s 9M17 core net profit stood at RM79m, well behind our earlier forecast as well as consensus. Negative surprise was a RM56m provision for impairment of receivables while “Others” segment, typically comprising unallocated corporate expenses ballooned (vs. negligible amounts in 1H17 if we exclude a RM127m loss on UMWOG disposal and ~RM70m Sukuk drawdown charges). On top of this, 3Q17 was marred by higher losses from the non-listed O&G units, while we suspect discounting for autos were higher given the festive season in the period, notwithstanding improved margins and earnings.

Earnings could have doubled sequentially. 3Q17 core net profit was flattish qoq owing to: (1) Losses from “Others” segment amounting to an estimated RM30m (excluding RM56m provision for receivables), (2) Higher losses from the non-listed O&G units which increased to RM28m from a core loss of RM12m in 2Q17 (after normalising for 2Q17’s RM40m one-off redundancy expenses for Oman operations) and RM10m in 1Q17. These offset an: (1) 11%qoq rise in auto division earnings and (2) A 28%qoq rise in equipment division earnings (3) The absence of RM28m of UMWOG losses in 2Q17 given completion of UMWOG disposal. If we were to exclude the RM30m “Others” loss, 3Q17 core earnings would have more than doubled qoq to RM57m, in line with the massive turnaround in consolidated segmental pretax profit (See Exhibit 4) to RM103m from 2Q17’s normalised pretax profit of RM40m. This would also explain the inflated 149% effective tax rate in 3Q17 – general provisions are usually non-tax deductible.

Forecasts conservatively trimmed. Given the disappointing set of earnings, we slash our FY17F/18F by 55%/22% to factor in: (1) Higher non-listed O&G losses (2) Higher unallocated corporate expense parked under “Others” in UMW’s segmental earnings (3) Higher vehicle discounting for FY17F with expectations of a gradual rollback in FY18F on the back of new launches. We suspect the higher losses under “Others” in 3Q17 could be due to a provision for a loss on sale of a 49% stake in UMW’s Komatsu distribution business to the principle (expected to be completed by year-end), which would be one-off in nature. For now however, we conservatively factor in higher losses for the segment pending further clarification from management.

Source: MIDF Research - 29 Nov 2017