KEY INVESTMENT HIGHLIGHTS

• FY19 earnings missed estimates

• Core earnings fell18%yoy dragged by weaker equipment and auto division

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

• FY19F/20F earnings revised lower to factor in weaker outlook for Toyota and equipment division; anticipating a contraction in UMW Toyota volumes

• Maintain NEUTRAL, TP trimmed to RM3.40 (from RM4.50)

UMW’s FY19 missed estimates. The group reported core earnings of just RM12m for its 4Q19, which brought FY19 core earnings to RM266m. This accounted for just 79% of our forecast and consensus. An interim dividend of 2sen/share was declared, bringing FY19 dividends to 6sen/share.

Reason for deviation. The key deviation against our forecast is lower than expected earnings contribution from the equipment division. In 4Q19 in particular, the equipment division registered a net profit of just RM6m (vs. RM82m in 9M19) given sluggish demand in Malaysia and Myanmar for both heavy equipment and industrial equipment. 4Q19 equipment revenues fell 17%yoy (FY19: -8.5%)

Earnings eased. Group core earnings fell by 18%yoy in the back of weaker automotive and equipment division earnings. The former was driven mainly by weaker associate earnings (comprising mainly by 38% stake in Perodua) given a high base in 4Q18 inflated by fulfillment of back orders after the production disruption for the MyVi production line was resolved. The weaker auto division earnings came despite much stronger Toyota TIV (+67%yoy). However, for FY20F, management is anticipating lower UMWT volumes (Toyota and Lexus) of 66K units from ~70K in FY19 (-5.7%yoy) given macro headwinds and softer consumer sentiment.

Bright spot in M&E division. The M&E divison is a bright spot for UMW. UMW aerospace in particular, saw earnings turnaround a year earlier than planned given higher volumes for fan cases and cost optimization. The group is looking at plant utilization to improve to 70% in FY20F from around 50% last year given further volume ramp-up and commencement of Trent 7000 fan case production in 4Q20.

Earnings revision. Given weaker than expected results (mainly from the equipment division) and a weaker outlook for autos (Toyota in particular), coupled with intense competition given Honda’s model replacement cycle in FY20F, we trim our FY20F/FY21F by 18%/16%. Despite the cut, we still expect earnings to recover from FY19 depressed base driven by improved profitability of the aerospace division.

Recommendation. We remain NEUTRAL on UMW at a lower TP of RM3.40 (from RM4.50 previously) following the earnings downgrade in this report. We also peg the auto and equipment divisions to a lower 9x PER (from 10x) in view of a deteriorating outlook. For exposure to Perodua, we recommend investors switch to MBM which offers much cheaper entry, much more attractive dividend yields and a more leveraged exposure to Perodua earnings.

Source: MIDF Research - 28 Feb 2020