UMWH Holdings (UMWH MK; SELL; TP: MYR4.65) - Swung to core net loss in 2Q16
- Negatively surprised by higher taxes. UMWH’s 1H16 pre-tax profit (70% of our FY16 forecast) is in-line as we expect 2H16 pre-tax profit to weaken mainly from higher auto A&P expenses and lower O&G activities. Nonetheless, 1H16 core earnings surprised negatively on higher-than-expected taxes; further clarification needed from management. No dividend was declared in 2Q16. We cut FY16 net profit forecast by 48% to reflect high taxes in 1H16; FY17/18 estimates are unchanged. Valuations are expensive. Maintain SELL; MYR4.65 SOP-based TP unchanged.
- Cut FY16 earnings by 48% on higher 1H16 taxes. On the back of stiff competition, UMW Toyota has offered substantial discounts in its recent Merdeka sales campaign (MYR1.5-8.0k per unit depending on models). Along with year-end sales campaign, we believe that auto margins will be impacted by higher A&P expenses, leading to weaker 2H16 auto earnings – no changes in our estimates. Nonetheless, we impute higher taxes, due to certain expenses not allowable for tax purpose, into FY16 forecast; further clarity needed from management. For now, we expect taxes to normalise in 2H16 (24% corporate tax).