Review

• UMW Holdings Bhd (UMW) reported headline net losses of RM1.57bn in 4Q16. After excluding all exceptional items, including a huge one-off impairment of RM1.22bn, core net loss for 4QFY16 amounted to RM283.2mn. This was significantly below ours and consensus’ estimates. FY16 core net loss was RM401.8mn (>-100% YoY)

• The earnings miss was mainly attributable to huge losses in its O&G division. Furthermore, UMW’s unlisted O&G assets, recorded under its “Others” division, further exacerbated the earnings miss. Revenue, however, was slightly better than expected due to higher sales volume in the automotive sector. In addition, there were huge impairments on the unlisted (RM382mn) and listed oil and gas assets (RM780mn).

• Automotive - The segment saw a revenue and PBT YoY decline of 21.1% and 42.5% respectively on the back of significantly weaker sales volume. Furthermore, the weak Ringgit versus USD compressed margins greatly. Additionally, intense competition from other marques exacerbated margin contraction, thus impacting profitability.

• Oil & Gas - The segment posted lower FY16 revenue (YoY: -61.8%) and greater PBT losses (FY15: RM350mn loss) as a result of the low crude oil price environment. The lower DCRs and fleet utilization rates caused UMW to make a major impairment of RM780.0mn in 4QFY16. Going forward, UMW plans to exit this business with a distribution in specie to shareholders.

• Equipment - The segment registered lower FY16 revenue of RM1.4bn (YoY: -26.6%) due to:- 1) lower demand for new equipment as competition intensified, and 2) the change in Myanmar’s government restricted import of heavy equipment. This led to a 34.8% YoY decline in PBT for the segment.

• Manufacturing & Engineering - The segment registered lower FY16 revenue of RM599.6mn (YoY: -14.7%). However, it posted better FY16 PBT due to the disposal of a loss making automotive component business in India in end-FY15.

• No dividend was declared for the quarter and year under review.

Impact

• We make the following changes to our model: 1) deconsolidated UMW-OG, by removing its earnings for half-year in FY17 and full-year in FY18, 2) reduced losses from unlisted O&G asset following asset impairments, 3) reduced Toyota sales forecast to 70k units, and 4) incorporated FY16 numbers into our model. Thus, our earnings forecast is raised by 42.4%/48.1% in FY17/18.

• We also introduce FY19 earnings of RM450.3mn, which implies earnings growth of 37.8%, mainly due to the low base effect, coupled with the new automotive plant.

Outlook

• New model launch of the Vios FL (4QFY16), and Innova (4QFY16) may increase interest in UMW’s brand going forward. However, we expect TIV in 2017 to remain subdued with slow recovery. Note that Toyota is expected to launch its C-HR which is a Honda H-RV competitor.

• The deconsolidation and sale of its listed and non-listed O&G assets should narrow losses significantly going forward. Furthermore, it will strengthen UMW’s balance sheet resulting in net gearing improvement to 0.25x (previous: 0.61x). The deconsolidation is expected to be complete by 1HFY17.
   
• All in, we believe UMW’s near-term earnings outlook remains challenging given 1) the weak consumer sentiment and stringent HP loan requirements, 2) lower demand for its equipment division products, and 3) long gestation period for the Rolls Royce plant. Note that there will be an analysts briefing later today.

Valuation

• Target price increased to RM4.56 (previous: RM4.05) after 1) revising our valuation methodology for the “Others” segment to P/B (previously: PER), 2) removed UMW-OG from the SOP and 3) accounted for change in earnings forecasts. Maintain Sell as we do not see any near-term re-rating catalyst for the Group.

Source: TA Research - 28 Feb 2017