KEY INVESTMENT HIGHLIGHTS

• Slipped into a core loss of RM33m in 2Q20 given full impact of MCO, but weak quarter not unexpected given expectation of significantly backloaded year

• Two new CKD models to commence order taking from Dec20, positioned to sustain momentum post-tax holiday

• Four model updates by year-end, Toyota TIV showing strong recovery, up 31%yoy in July, now the largest non-national

• Trent 7000 fan case deliveries targeted for October, exploring new applications for precision machining

• Maintain BUY at unchanged TP of RM3.40

Normalised 2Q20 broadly within expectation. UMW reported a core net loss of RM33m for its 2Q20. This pulled down 1H20 core net profit to RM16m. Though this accounts for just 8.4% and 7.2% of our and consensus’ FY20F, the weak quarter was not entirely a surprise as we had expected earnings to be significantly backloaded this year. The 1H20 core net profit is derived after normalizing for: (1) RM44m share of loss of 30%-owned Toyota Capital Malaysia (TCM) from present value impact of the loan moratorium – provision made up to 30th Sep 2020 (2) RM28m forex loss on sale of unlisted O&G investment (3) RM20m reversal of receivables impaired previously (4) RM2m gain on disposal of properties.

Weak quarter, but not unanticipated. The 2Q20 reflects the full impact of the lockdowns between mid-March till early-May, hence the weak quarter was not entirely unexpected. 2Q20 Toyota TIV dropped 56%yoy to 7784 units while Perodua TIV dropped 52%yoy to 29,193 units. As a result, the auto division reported a pretax loss of RM42m. Equipment division PBT dropped 31%yoy to RM25m while M&E division PBT dropped 39%yoy to RM8m.

Expect a strong bounce from 3Q20. We expect earnings from 3Q20 onwards to bounce strongly driven by the tax-holiday announced under PENJANA. Toyota TIV has shown significant improvement in July, up 31%yoy to 7,429 units with a 12.9% market share, overtaking Honda as the largest non-national. Perodua too, has shown significant TIV improvement, up by 33%yoy and 17%yoy in June and July respectively. Management stopped short of giving a new Toyota TIV target for FY20F, but assuming the July momentum sustains till year end, it could easily breach the 60K mark, on our estimates. We keep our FY20F Toyota TIV of 62,981 units unchanged at this juncture

Source: MIDF Research - 28 Aug 2020