Results: UMW Holdings (UMWH MK; HOLD; TP: MYR7.80) - Negative surprise; weak outlook

UMW Holdings (UMWH MK; HOLD; TP: MYR7.80) - Negative surprise; weak outlook

• Further weakness ahead. 2Q15 core net profit of MYR53m (-69% QoQ, -75% YoY) took 1H15 core earnings to MYR225m (-49% YoY), meeting just 36%/33% of ours and consensus full-year forecasts – below expectation. A 10sen interim DPS, to be paid on 8 Oct, was declared.

Key disappointment:

                     I.        Auto: Hit by high USD-denominated costs from the weaker MYR (pre-tax margin: -2ppts QoQ).

                    II.        O&G: Suffered from underutilisation of its JU rigs on top of DCR contraction amid weak drilling sentiment (pre-tax profit: -81% QoQ).

                   III.        Non-core: Losses widened by 71% QoQ to MYR99m.

• Cut FY15/16/17 earnings forecasts by 34%/20%/20% to account for (i) higher auto COGS from the weaker MYR (from USD1/MYR3.60 average to USD1/MYR3.85 average for FY15), (ii) losses in the O&G division from 2H15 onwards as we cut blended JU utilisation to 50%-69% (from 62%-75%) coupled with lower DCRs of USD110k (from USD125k-130k) and (iii) bigger losses in the non-core division (clarity is needed from management).
• Stay sideline.  With no catalyst in sight, we stay sideline on UMWH for now. SOP-TP lowered to MYR7.80 (-18%). Yields are decent at 3+%.