KEY INVESTMENT HIGHLIGHTS

• 1Q20 core earnings accounted for 26% of our FY20F despite expectations of a backloaded year; potential upside risk if 2Q20 turns out more resilient than expected

• Positive surprise from briefing - two new CKD models scheduled for launch in 2H20

• Signals renewed optimism given tax-holiday incentive, cost optimization in the works

• M&E division is a bright spot, Trent 7000 fan case production scheduled for 4Q20

• Re-affirm BUY at unchanged TP of RM3.40

Possible chance of outperformance. UMW’s 1Q20 core net profit of RM49m accounted for up to 26% of our FY20F (23% of consensus) although we had expected earnings to be largely backloaded into the 2H20 this year (given that the tax-holiday demand boost will only come from June onwards). We deem the results in-line as we anticipate a weaker 2Q20, but we flag upside risk to our forecasts should the 2Q20 turn out to be more resilient than expected. Its 1Q20 core net profit of RM49m was derived after normalizing for RM20m reversal of receivables impaired previously, RM28m forex loss on sale of unlisted O&G assets & RM3.2m gain on disposal of properties.

Weak 1Q20 not unexpected. Group core earnings fell -44%yoy but this was not unexpected given the MCO from 18th March till 4th May, which impacted the auto, equipment and M&E division in 1Q20. Autos and equipment division resumed operations since early May while the aerospace division resumed operations earlier in mid-April. Despite the lockdowns, the M&E division registered much higher profits in 1Q20 (+350%) given that it achieved breakeven in late FY19, ahead of previous expectations.

FY20F auto earnings to be backloaded. We expect 2Q20 performance for autos to weaken further before a strong rebound in 3Q20 as 2Q20 will reflect a full month of lockdown vs. half a month in 1Q20, UMW Toyota had an FY20F TIV target of 45K (-35%yoy), but this is based on the previous MAA projections prior to implementation of the tax-holiday – management expects the numbers to be revised upwards, but affirmed that it would still be targeting to maintain a market share of 11.3%; this is in-line with our current projected market share for Toyota. Management was tight-lipped on the magnitude of daily bookings post-tax-holiday announcement, but did not stop short of signaling renewed optimism and improvements in sales trends as a result of the incentive. This is coupled with a step-up in launches in 2H20, which includes new locally assembled models (1H20 launches were mostly CBU models). Management also indicated that Perodua is less impacted by the economic impact of the pandemic outbreak given downtrading by consumers; Perodua’s previous TIV projection implied a lower-than-industry contraction in sales.

Source: MIDF Research - 16 Jun 2020