We left UMW’s analyst briefing feeling neutral after the release of its 4Q results. The main issues discussed include 1) impairment of O&G assets, 2) Serendah, aerospace components hub in the making 3) provisions on “Others” assets and 4) deconsolidation of UMWOG. We maintain our view that near-term earnings outlook remains bleak. However, we include UMWOG’s TP of RM0.54 to our valuation as it will be distributed to UMW’s shareholders. Hence, our Sum-of-Parts TP is revised to RM5.12 (previous: RM4.56). Maintain Sell.

Key takeaways from the analysts’ briefing are as below:

• UMW’s core segments, if O&G was excluded, remained profitable at the PBT level albeit registering lower earnings. This was mainly due to a challenging operating environment. Nevertheless, management expects 2017 to be a turnaround year.

• Management revealed that there was circa RM289mn forex losses in its automotive segment in FY16. This was a result of the USD appreciating from RM4.29/USD to RM4.49/USD at the start and end of FY16 respectively.

• There was circa RM899mn worth of provisions accounted for in UMW’s FY16 earnings. The provisions were carried out for 1) UMW’s JV, United Seamless Tubulaar, a pipe manufacturing plant in India and 2) autoparts manufacturing businesses in India.

• UMW has set its 2016 sales forecast for Toyota at 68k (FY16: 63.8k) units, Lexus at 2k (FY16: 1.4k) units and Perodua at 202k (FY16: 207.1k) units. This is premised on the slight recovery in TIV expected by MAA.

• For the Group’s equipment segment, UMW sees exciting prospects on the domestic front, underpinned by new mega projects worth over RM550bn. They include:- 1) Pan Borneo Highway, 2) Bandar Malaysia and 3) LRT3/MRT2/MRT3.

• The Rolls Royce plant is completed and UMW plans to make its land in Serendah an aerospace components manufacturing hub. Recall that UMW has a vast land bank of 861 acres in Serendah. Management shared that several major aerospace components suppliers have expressed interest to lease/purchase land in the area.

• We do not discount the possibility of UMW forming a JV with a property developer to unlock the land’s potential value. This is understandable given that UMW does not have experience in property development.

• UMW remains committed to dispose its unlisted O&G assets. It expects minimal operating losses from the segment due to heavy impairments in FY16. UMWOG demerger is expected to be complete in 2HFY17 and will bolster UMW’s balance sheet significantly.

• Impairments made for its unlisted O&G assets were a combination of 1) provisions made as the Group provided financial guarantees for borrowings and 2) reduction in assets carrying value to its net realisable value

• Capex guidance for the year is circa RM750mn. The lion’s share (circa RM400mn) will be utilised by the automotive segment for its new plant in Bukit Raja. To recap, the new plant in Bukit Raja will cost circa RM2bn over 3 years.

Impact

• FY18 earnings forecasts are tweaked downwards by 1.4% as we adjust capex assumption higher in-line with management’s guidance.

Valuation

• We include UMWOG’s TP of RM0.54 to our valuation as it will be distributed to UMW’s shareholders. Hence, our SOP TP is revised to RM5.12 (previous: RM4.56). Maintain Sell. Re-rating catalysts include 1) higher than expected automotive sales volume, 2) stronger MYR versus USD, and 3) lower than expected losses in for non-core assets.

Source: TA Research - 1 Mar 2017