UMWH Holdings (UMWH MK; SELL; TP: MYR4.50) - Just cannot catch a break

UMWH Holdings (UMWH MK; SELL; TP: MYR4.50) - Just cannot catch a break

• Unexplained losses at non-core division. UMWH’s 3Q16 core losses widened by 7x QoQ to MYR125m, mainly due to a surprise unexplained pre-tax loss of MYR122m (+2.6x QoQ) at its non-core division. Elsewhere, losses at the O&G (listed) division also widened on low rig utilisation. External headwinds especially from a strong USD would continue to negatively impact UMWH’s auto division. Against this backdrop, we now forecast FY16 to fall into a core net loss of MYR209m and expect no dividends over FY16-18 considering these difficult times. Our SOP TP is revised down to MYR4.50 (-3%); maintain SELL.
• Further clarity needed. Having imputed wider losses at the (i) non-core division and (ii) O&G divisions (both listed and unlisted) on lower utilisation rates, we now expect FY16 to fall into a core net loss of MYR209m before returning to small profits in FY17/18. Our revised forecasts have factored in a normalised loss of MYR25-30m per quarter at the non-core division (vs pre-tax loss of MYR122m in 3Q16 where further clarity is needed). While earnings at the auto division held up quite well in 3Q16, recent strength in USD (USD1/MYR4.47 now vs average of USD1/MYR4.05 in 3Q16) would likely hit UMWH in the next two quarters.
• Worst performance in the last 10 years. FY16 appears to be a washout year for UMWH with potential impairment in the O&G divisions in 4Q16. Meanwhile, operational recovery visibility remains hazy. This, coupled with a weak P&L and absence of dividends, support our SELL call.