• Strong recovery in 1Q18, underpins earlier BUY thesis

• Massive 79% dividend payout signals optimism

• Proxy to further RM strength and TIV recovery

• Reaffirm BUY at unchanged TP of RM7.11

Earnings within expectations. UMW registered 1Q18 net profit of RM74m (or actually RM109m for continuing operations excluding nonlisted O&G units). The reported RM74m net profit was in-line and accounts for 20% of our FY18F and 21% of consensus. UMW has started to deconsolidate its non-listed O&G units in 1Q18. Even on a like-for-like basis (excluding non-listed O&G losses for both 1Q18 and 1Q17), earnings grew by a strong 29%yoy. On reported basis, 1Q18 earnings more than tripled yoy.

Auto margins almost doubled. Despite weaker volumes in-line with industry (given wait-and-see ahead of GE14), UMW autos delivered strong 45%yoy earnings growth. Auto margins almost doubled from 4% a year ago to 6.7% and are highest in the past 2 years. These are sustainable earnings given the strong RM now and gradual rollback of discounting in the market as inventories normalise. This was also supported by strong Perodua TIV (+11%yoy) following launch of the new Myvi late-FY17. The trend underpins our thesis of as strong recovery driven by the auto segment.

Volume recovery soon. Buyers have been holding back purchases in 1Q18 ahead of GE14 and the trend is obvious for the non-nationals, possibly in anticipation of manifestos related to vehicle duty reduction (which affects mainly the non-nationals). However, as it turns out, duty reduction will only be offered for 1st car buyers. As it is, April TIV numbers (to be released in detail today) has already shown a recovery (+10%yoy) after a 4%yoy decline throughout 1Q18. We expect a significant boost from the GST/SST-free period – though effective from 1st June, most key players are already offering GST rebates from midMay.

Further margin expansion. On top of this, we estimate the USD:RM booked in for 1Q18 was RM4.16 (against an estimated RM4.26 in 4Q17), compared to RM3.90-4.00 levels now. Impact of forex is delayed by a quarter given physical stock-up.

Maiden dividends after 2 years. Underlining management’s optimism on earnings recovery, UMW announced its maiden dividend in 2 years (of 5sen/share), representing a massive 79% payout, well above UMW’s historical payout ratio of 50%. At this rate, UMW may outperform our earlier forecast of a 50% payout.

Upward revision cycle. Our forecasts (about a quarter ago) were previously 20%/39% (FY18F/19F) ahead of consensus but the gap has now narrowed to just 6%/27% reflecting positive uptrend in consensus revision cycle.

Recommendation. Re-affirm BUY on UMW at unchanged TP of RM7.11/share. Key catalysts: (1) A deleveraged balance sheet post UMWOG demerger allows room for acquisitive growth and possible resumption of dividend payouts – successful acquisitions from PNB and MBM to increase Perodua stake are strong share price catalysts (2) Reversal of prior years’ market share loss, structural cost reduction and pricing advantage from UMW Toyota’s EEV-focused strategy (3) Redevelopment of UMW’s 830 acres Serendah land which will unlock value of the asset – easily worth 40sen/share on our estimates (4) A more than quadrupling of M&E division earnings once its aerospace division reaches full scale production.

Source: MIDF Research - 23 May 2018