• 2Q18 earnings within expectations

• Core earnings more than doubled YoY

• Expecting strong 3Q18

• Reaffirm BUY at unchanged TP of RM7.11

Earnings within expectations. UMW registered core net profit of RM76m for its 2Q18, which brought 1H18 core earnings to RM150m While this accounts for only 40% and 43% of our and consensus FY18F respectively, we consider it as in-line given an exceptionally strong 3Q18 ahead driven by the tax-holiday period.

Core earnings more than doubled. 2Q18 earnings were up 177%yoy mainly driven by strong recovery in auto earnings from a stronger RM and improved Toyota TIV (+11%yoy). The 2Q18 captured only 1 month of the 3-moth tax holiday period. We expect exceptionally strong TIV in 3Q18 which should more than make up for the shortfall in 1H18, notwithstanding expectations of a weak 4Q18 post-SST. On sequential basis, earnings were largely flat despite Toyota TIV rising by 50%qoq - Perodua invoiced sales actually fell 10%qoq (despite capturing onemonth of tax holiday) possibly due to dealers holding back purchases in May to avoid complications in the transition to a zero-rated GST. This should improve in 3Q18. While there is a disruption of the MyVi line due to technical issues at one of the vendors (affecting 3K unit deliveries) the matter is already being rectified and the MyVi line is expected to be up and running from mid-Sept.

Exceptionals from unlisted O&G. The 2Q18 involved: (1) Write down of investments (2) Partial write-back of past provision for a financial guarantee (amount provided for previously was RM254m). While the exact amount of the 2 items was not forthcoming, we estimate the former at RM88m and the latter at RM137m. We estimate that the carrying value of the non-listed O&G units has been written down to circa RMR26m, now insignificant.

Slow progress in disposal this year. We understand that there has been little progress this year on disposal of the unlisted O&G unit, but note that core losses (~RM17m/quarter) is now less than half that of the run-rate in FY17 given massive impairments already taken. That said, one of the 9 assets left which is listed is slated to be fully disposed soon.

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, and (4) A more than quadrupling of M&E division earnings once its aerospace division reaches full scale production.

Source: MIDF Research - 30 Aug 2018