Results: UMW Holdings (UMWH MK; SELL; TP: MYR7.15) - The worse has yet to come

We are downgrading UMW Holdings to SELL following its poor 3Q15 results.

UMW Holdings (UMWH MK; SELL; TP: MYR7.15) - The worse has yet to come

• Further weakness ahead. 3Q15 core net profit of MYR82m (+51% QoQ, -61% YoY) took 9M15 core earnings to MYR307m (-55% YoY) representing 76%/68% of our/consensus FY15 forecasts – below expectation, in anticipation of a weaker 4Q15 from softer Auto and O&G earnings. 3Q15/9M15 headline net profits included a net negative MYR60m mainly from impairment of non-core assets and write-down of inventories. No dividends declared – a negative surprise.

Key disappointment in 3Q15 earnings were in the Auto division where pre-tax margin contracted 5.3ppts, hit by high USD-denominated costs from the weaker MYR against USD. Also, losses in the non-core division widened by 20% QoQ to MYR118m.

• Cut FY15/16/17 earnings forecasts by 7%/16%/16% as we slash our Auto pre-tax margin assumption by 1.5-2ppts to account for the weaker MYR (USD/MYR avg: from 3.85 to 4.00) and higher A&P expenses. FY16/17 earnings cuts are exacerbated by softer vehicle sales (-5k units each to 90k/95k units), partially offset by higher ASPs (+8%) as Toyota hikes car prices from 1 Jan 2016 onwards.
• Downgrade to SELL.  Weak auto outlook coupled with poor sentiment in O&G division (losses in 2016), UMWH’s potential exit as a FBM KLCI constituent in the coming review and expensive valuation (19.4x FY16 PER), we turn negative and downgrade UMWH to SELL.