This article first appeared in The Edge Financial Daily on December 4, 2018

UMW Holdings Bhd
(Dec 3, RM5.40)
Maintain buy with a higher target price of RM6.45: UMW Holdings Bhd’s cumulative nine months ended Sept 30, 2018 (9MFY18) pre-tax profit rose 189% year-on-year (y-o-y) to RM682 million, driven by a better performance from three core segments, a higher associate contribution (+49% y-o-y; 9MFY18 Perodua car sales +11% y-o-y), and lower losses from the unlisted oil and gas (O&G) operations.

With Toyota sales in the cumulative ten months of FY18 at 58,000 units, it is on track to hit the 2018 sales target of 70,000 units; Perodua is likely to exceed the 2018 sales target of 209,000 units, in our view. Elsewhere, the equipment segment grew 14% y-o-y on a better performance from the industrial equipment.

While we note there was no disposal of O&G assets this quarter, we believe the losses will likely lessen further as the group remains committed to exit the O&G industry moving forward.

All in, 9MFY18 results were ahead of our and consensus expectations, achieving 132% and 94% of our respective forecasts. In terms of operations, UMW’s third quarter ended Sept 30, 2018 (3QFY18) performance was commendable on similar positives to the aforementioned.

However, 3QFY18 pre-tax profit was lower 23% quarter-on-quarter due to a reversal of provisions of RM100 million in 2QFY18, which we believe was likely from the unlisted O&G segment.

As per an announcement on Bursa Malaysia, UMW will dispose of a piece of industrial land in Shah Alam for a cash consideration of RM287.7 million. The group will relocate its ongoing business operations, mainly equipment, and mechanical and electrical ones, in Shah Alam to the proposed UMW High Value Manufacturing Park in Serendah, Selangor. The proposed disposal is expected to be completed by 2QFY19, which may see an expected one-off gain of RM171.4 million in 3QFY19.

We raised our 2018 to 2020 estimate core earnings per share (EPS) forecasts by 8% to 18% to factor in the higher-than-expected 9MFY18 results, a lower effective tax rate of 21% (the previous forecast was at 25%), higher contributions from associates and a higher investment income.

In tandem with our earnings upgrade, we raised our sum-of-the-parts to RM6.45 from RM6.30 previously. At 10 times 2019 estimated price-earnings ratio, we believe valuations are attractive, in view of the new volume-generative Toyota model line-ups, a decent growth from UMW’s two core segments, lower losses from the unlisted O&G operations and a higher Perodua association contribution. Downside risks include higher-than-expected losses of O&G assets and weaker-than-expected vehicle sales. — Affin Hwang Capital, Dec 3