• 1Q19 broadly within our expectation

• Automotive earnings supported by strong Perodua earnings, despite Bukit Raja depreciation

• FY19F/2F earnings revised down 5.8%/5% to reflect new more conservative USD:MYR assumption

• Maintain NEUTRAL at lower TP of RM5.85

1Q19 broadly in-line. UMW’s 1Q19 net profit came in at RM87m for 1Q19, accounting for 20% of our forecast and 17% of consensus. This is broadly in-line with our expectation as we expect Toyota TIV to improve in the coming quarters following launch of the all new Yaris model in Apr19. Our current 75K FY19F Toyota TIV is in-line with management’s target.

Automotive segment. Automotive revenues improved 15%yoy on the back of higher Toyota TIV (+8.2%yoy) but pretax saw a slight decline (- 1.4%yoy) given higher depreciation from the new Bukit Raja plant. This was partly compensated by higher earnings from Perodua, which we expect to register record high earnings in FY19F following launch of the Aruz.

Equipment division. The equipment division registered improved revenue (+2.6%yoy) but pretax earnings were down by 6.2%yoy. Margins were hit by higher competition in both the heavy equipment and industrial equipment units. However, the revival of a few mega projects bodes well for the sector in the mid-term.

M&E division. The M&E (mechanical & engineering) segment registered a strong 40%yoy revenue increase which was driven by higher fan case volumes for UMW Aerospace and improved sales of the auto components business. The division swung from a RM3m pretax loss in 1Q18 to a pretax profit of RM2.3m in 1Q19.

Forecast revision. Although UMW’s 1Q19 was broadly in-line with our expectation, we trim our FY19F/20F earnings by 5.8%/5% given changes to our USD:MYR assumptions. We now assume FY19F/20F USD:MYR average at USD:MYR4.12 versus USD:MYR4.05 previously, following the recent OPR cut and in-line with the change in our in-house expectation.

Recommendation. We keep UMW at NEUTRAL at a lower TP of RM5.85 (from RM6.15 previously) following the earnings downgrade in this report. While we stick to our view that BR is a significant game changer for UMW, we would expect some gestation period before more meaningful earnings accretion kicks in. For the meantime, we think the market has sufficiently discounted the group’s FY19F earnings growth prospects.

Source: MIDF Research - 23 May 2019