UMW Holdings Bhd
(March 7, RM5.95)
Maintain “hold” rating with a target price (TP) of RM5.05: UMW Holdings Bhd’s market share fell from 14.4% in the financial year ended Dec 31, 2015 (FY15) to 11.2% on a challenging market environment and less exciting launches.

To recap, UMW in 2016 launched the all-new Toyota Hilux, Fortuner, Alphard, Vellfire, Sienta and Innova, and in the fourth quarter of 2016, it introduced three facelift models, namely Vios, Camry and Corolla Altis. Perodua’s first-ever sedan, Bezza, was also launched in July 2016.

However, the fruits of all the new launches have not yet been reflected in the automotive division’s yearly segmental results, with revenue down 21.1% year-on-year (y-o-y) to RM8.45 billion and profit before tax down 42.5% y-o-y to RM493.1 million.

Reasons for the decline included aggressive competition amid weak consumer sentiment, along with stringent loan approvals by banks. In particular, the continued weakness in the ringgit culminated in RM289 million of foreign-exchange losses due to US dollar-denominated imports.

UMW was hit with RM2.2 billion of impairment losses in 2016, of which RM1.34 billion was from the oil and gas (O&G) division, while another RM899 million was for write-offs of the United Seamless Tubulaar venture in India. UMW had provided a 100% guarantee for the loan.

As UMW demerges from UMW Oil & Gas Corp Bhd (UMW-OG) by the second half of 2017, the RM308 million inter-company loan provided to the latter would be expected to be repaid in 2018. Meanwhile, we expect operational losses from the non-listed O&G business to decline to RM120 million in FY17.

Though we have stripped out operational losses from UMW-OG and the non-listed O&G business in our FY18 estimates, we see no signs of a broad improvement in its core businesses. Our FY18 earnings growth forecast of 51.3% y-o-y reflects a normalisation of earnings after exiting both O&G businesses with no drastic improvement in the rest of the core businesses.

Even with our above-consensus earnings forecasts, the stock is currently trading at a 15.1 times FY18 price-earnings ratio (PER), which is above its historical mean PER range of 12 to 13 times. We believe most of the positives have already been priced in, given the current premium valuation.

Nonetheless, we retain our “hold” rating as the diversification of O&G businesses should prepare UMW for the next wave of growth in the longer run, with free cash flow expected to turn positive from FY18. Key upside risks to our call include a recovery in consumer spending. Downside risks to our call include further weakness in automotive sales.

We maintain our “hold” rating and 12-month sum-of-parts-based TP of RM5.05. — Affin Hwang Investment Bank Bhd, March 7