• FY17 core earnings outperformed

• Thesis of core earnings turnaround underpinned

• However, UMW is priced to perfection and strong earnings recovery already reflected in our above-consensus forecast

• Downgrade to HOLD from BUY at revised TP of RM6.70

Earnings outperformed consensus. UMW reported core net profit of RM108m for its 4Q17, bringing FY17F core earnings to RM168m. This is a tad ahead of our forecast and is double that of consensus accounting for 110% and 205% of estimates respectively. Key exceptionals in 4Q17 were: (1) RM286m in impairment of non-listed O&G assets (2) RM254m provision for early settlement of a financial guarantee.

Autos benefitted from strong RM. Auto division earnings rose 38%qoq while margins expanded from 5% to 6% sequentially. The division benefitted from the strong Ringgit, strong Perodua earnings from launch of the new MyVi and partly, seasonal strength in Toyota TIV from year-end sales campaigns. Toyota TIV was up 30%qoq and 5%yoy but this strength should normalise moving into the new year. FY18F is unlikely to see any major model launches with CKD launches likely to be delayed till FY19F after the new Bukit Raja plant commences operations. Key new launches this year are the CBU CHR and the new CBU Rush. There is a possibility of a facelift Vios while the new CKD Camry is likely to be pushed out to FY19F.

Above-consensus FY19F already reflects strong recovery. Our FY19F already factors in a 13%yoy increase in Toyota TIV to 82K units and a 62% jump in auto division earnings to RM424m vs. that achieved in FY17A. Our FY18F/FY19F assumes RM4.00:USD against the current RM3.90 levels. For FY18F specifically, we would not expect a significant increase in Toyota TIV as major CKD launches are likely to be pushed back to FY19F. While UMW used to generate core earnings of RM800mRM1b back in FY13-14, Toyota back then was the largest non-national with annual TIV of 93K-102K while the RM stood at 3.2-3.4 against the USD. There is some way to go for UMW Toyota to regain such market share from where it stands today at ~70K (See Exhibit 3). Currently, our FY18F/19F are 20%/27% above consensus.

Priced to perfection. We raise our SOP-derived TP to RM6.70 (from RM6.00) as we rollover our valuations to FY19F, but now downgrade our contrarian BUY on UMW to a NEUTRAL. After a strong share price run-up in the past 12 months and a lack of further incremental catalyst in the near-term, share price might take a breather. We suggest investors lock in profits and switch into a fresh turnaround idea in Tan Chong Motor (BUY, TP: RM2.05).

Source: MIDF Research - 28 Feb 2018