UMW Holdings : Exit from O&G HOLD

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UMW Holdings : Exit from O&G HOLD

We maintain our HOLD call and FV of RM4.60 for UMW. UMW has mapped a plan to exit the O&G sector entirely: (1) it will de-merge from UMW O&G (UMWOG) by distribution in specie of its 55.7% stake to existing UMW shareholders. (2) it will make further impairments on the non-listed O&G assets  that have been loss-making. UMW said this will allow it to focus on the areas of auto, equipment and manufacturing & engineering. The auto segment has contributed 70-80% of revenue and taking the O&G segment out will allow UMW to focus on reforming the former.  In terms of the impact to earnings, we estimate UMW could see an improvement of at least 1.2 times to its net profit going forward, as our projected losses before tax of –RM371mil and –RM173mil are removed from UMW’s income statement for FY17F-FY18F. In terms of topline, we project there could be an erosion of 1-6% given the contribution of O&G.

The move will also lower its borrowings and net gearing. UMW will take the RM2.16bil in borrowings under UMWOG off its books, reducing its total borrowings to RM2.7bil from RM5.3bil and net gearing to 10% from 51% as of end-Sept 2016. For existing UMW shareholders, they would have the option to exit from the O&G side following the completion of this exercise by end-2Q. For the rest, we believe the share price could appreciate on the view that this presents an opportunity to enter into UMWOG. We note the gap between the targeted completion of the separation from UMWOG (end-2Q) and the restructuring of UMWOG (end-3Q). Following the demerger, there will be more room for (and pressure on) UMW to shape up its auto business. The focus next should be on what UMW can do to lift Toyota sales, in what looks to be another grim year for the sector.

Others :

Pavilion REIT : A decent FY16       HOLD

UMW Oil & Gas Corportion : Demerging into vessel operations  HOLD

QUICK TAKE

Automobile Sector : End of a mellow year            NEUTRAL

ECONOMIC HIGHLIGHTS

Euro : Pendulum swing monetary policy

Malaysia : A low 30% probability for a rate hike in 4Q2017

NEWS HIGHLIGHTS

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