UMW Holdings (UMWH MK; BUY; TP: MYR13.82): Impacted by taxes, non-cores

UMW Holdings (UMWH MK; BUY; TP: MYR13.82): Impacted by taxes, non-cores

• What's New? 1H14 core net profit disappointed, accounting for 40%/41% of our/consensus initial full-year forecasts.

While 1H14 pretax profit (ex-EI) of MYR892m (+1% YoY) was just marginally below our expectation at 47% of our initial full-year forecast, core net profit of MYR387m (-17) was negatively skewed by higher-than-expected taxes (+47% QoQ to MYR128m in 2Q14) coming from its overseas subsidiary and non-allowable expenses, and higher-than-expected losses at its non-core operations. 

Elsewhere, 2Q14 auto profit was impacted by higher advertising and promotion (A&P) expenses (PBT margin: -1.2ppts QoQ) while associates (i.e. Perodua, WSP, USTPL) contribution was also lower (-41% QoQ to MYR24m).

UMWH declared an interim dividend of 10sen, to go ex on 4 Oct.

• What’s Our View? We lower our FY14/15/16 earnings by 12%/8%/8% imputing:

(i)         Higher taxes (+2ppts).

(ii)        Bigger losses at its non-core operations (+44-95%), mainly from the OCTG manufacturers (i.e. WSP, USTPL, BSS, BSW).

(iii)       Lower O&G earnings from lower operating days of Naga 3/5.

(iv)       Higher Toyota vehicles sales in FY14 (+7% to 102k units).

(v)        Stronger sales in the Equipment division (+11% to MYR1.9b) from the jade-mining industry in Myanmar following the uplift of mining suspension in Sep 2014.

After accounting for the above changes and higher taxes at the consolidated level, our FY14/15/16 earnings forecasts for UMWH are lowered by 12%/8%/8%. We have imputed a conservative loss estimate at its non-core ops pending a meeting with the management. Our SOTP-based TP is unchanged post our earnings revisions. Maintain BUY; our TP implies 16.4x 2015 PER.