KEY INVESTMENT HIGHLIGHTS

• 3Q19 earnings behind both our and consensus estimates

• Auto division dragged by lower TIV and weaker Ringgit despite strong Perodua contribution

• Equipment division facing sluggish demand and margin contraction from intense competition

• FY19F/20F earnings revised lower by 7%/13% to factor in latest Ringgit assumption and weaker outlook

• Maintain NEUTRAL, TP trimmed to RM4.50 (from RM5.35)

3Q19 disappointed. UMW reported a net profit of RM110m for its 3Q19, which brought 9M19 earnings to RM254m. This is below both our and consensus forecasts accounting for 69% and 64% of FY19F estimates respectively. A special dividend of 4sen/share was declared.

Earnings contraction. 3Q19 group earnings were down 14%yoy against a high base for autos last year which was driven by the tax holiday period. Additionally, the equipment division staged weak performance.

Automotive. Auto division registered a 13%yoy revenue decline against a high base last year (3Q19 Toyota TIV: -22%yoy), coupled with a drag from a stronger USD in the period (3Q19: RM4.15 vs. 3Q18: RM3.95). Pretax earnings were down by a narrower 7%yoy given a 49%yoy increase in associate earnings, largely driven by strong Perodua sales on the back of the Aruz, launched early FY19.

Equipment. The equipment division saw revenue fall 12%yoy given sluggish demand for both industrial and heavy equipment following a slowdown in construction, manufacturing, mining and logging activities. Pretax earnings fell by a larger 29%yoy given margin contraction on the back of intense competition.

M&E. The M&E segment held steady, registering largely flattish year-onyear growth in earnings. On a YTD basis, the M&E segment is the only bright spot, more than doubling earnings to RM31m (9M19) given production volume improvement at aerospace sub-segment.

Forecast revision. UMW inadvertently overstated its 2Q19 earnings by RM27m (a reversal of provision which should have been eliminated). Coupled with a lower Ringgit assumption (in-line with our latest in-house view) of USD:RM4.15 (from USD:RM4.12) and to factor in lower equipment division revenue growth and margins, we trim our FY19F/20F by 7%/13%. We expect FY19F earnings to remain flattish but we forecast a 15%yoy growth in FY20F, to be mainly driven by improvement at the aerospace division from scheduled increase in fan case production. The fan case division is originally guided to breakeven from FY20F onwards.

Source: MIDF Research - 29 Nov 2019