• FY18 results missed expectations

• Weakness at UMW Toyota given run-out of old Vios; partly countered by Perodua back order fulfilment

• Earnings under review pending briefing today

• Maintain BUY at unchanged TP of RM6.60

Core earnings underperformed. UMW’s FY18F core earnings underperformed expectations. Net profit came in at RM15m for 4Q18, bringing full year earnings to RM342m – this accounted for 91% of our forecast and 76% of consensus.

Auto division. Auto division revenue contracted 23%qoq on the back of a sharp 38%qoq drop in Toyota TIV, while pretax dropped 17%qoq. This was mainly due to run-out of the previous generation Vios ahead of launch of the new model in Jan19. With the new generation model, the number of Vios variant has been reduced to 3 vs. 5 for the outgoing generation – the top end TRD variant and lowest end Vios-J manual has been taken out given minimal volumes generated previously. Pricing is more or less maintained but the new Vios comes with more advanced safety features such as front collision warning. We estimate FY19F Vios volume of 30K-35K accounting for 37%-43% of our FY19F Toyota TIV.

Perodua partly countered the weakness. Despite, the weakness at UMW Toyota, Perodua registered strong growth – associate earnings expanded by 68%qoq given fulfilment of back orders for the MyVi which faced production issues in 3Q18.

Bukit Raja unlocks UMW’s potential. UMW intends to plug the gaps in its model mix once the new Bukit Raja plant comes on stream early January 2019. The first model to be produced is the new Vios followed by another B-segment model (Yaris) and a potential 3rd model. At 70% automation rate and 50K capacity on single shift, UMW aims for Bukit Raja to hit at least 80%-90% utilisation (on single shift) within its 1st year of operations, sufficient for Bukit Raja manufacturing operations to be profitable.

Recommendation. Maintain BUY at unchanged TP of RM6.60. Our forecasts are under review pending a briefing today, but we expect the weakness at UMW Toyota to be temporary and contained to FY18. Key catalysts: (1) A deleveraged balance sheet post UMWOG demerger allows room for acquisitive growth and resumption of dividend payout (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 - 28 Feb 2019