FW: UMW Holdings (UMWH MK; BUY; TP: MYR6.65) - Inflection year

 

 

Happy new year! We kick start 2018 with a bold non-consensus BUY rating on UMWH today. More details in the full report.

 

UMW Holdings (UMWH MK; BUY; TP: MYR6.65) - Inflection Point

• Resume coverage with a non-consensus BUY rating. We believe that the worst is over for UMWH, with earnings growth to resume, underpinned by higher vehicle sales and margin expansion, the latter thanks to a much stronger MYR. We project a strong core earnings rebound in FY18 (+3.3x YoY), continuing into FY19 (+44% YoY). Post its demerger with UMWOG, UMWH is refreshed with a strengthened balance sheet to move forward. We resume coverage on UMWH with a BUY rating and a new SOP-based TP of MYR6.65.

 

• Earnings to recover strongly. We forecast +7% YoY vehicle sales growth for UMWH in FY18, driven by new model launches - Toyota CH-R and Harrier in 1Q18, Camry in 2H18. We also expect margins recovery for its Automotive division from 1Q18 onwards in the form of lower imported component costs, on the back of a stronger MYR against USD; MKE FX Research Team forecasts MYR's strength to sustain with an end-2018E forecast of 3.95 per USD1. We project UMWH's Auto pretax margin to recover to the 7-8% level going forward, from 5-6% in 2015/16.

• Progress in rationalisation of non-core ops. Streets' concerns of lingering losses at UMWH's non-core oil and gas operations may have understated the potential recovery at UMWH's Automotive division, which is the key contributor to the group, at 75-80% of group revenue and almost all of its earnings. We note that UMWH has, in recent times, seen some progress in its plans to rationalise these non-core assets - 2 non-core subsidiaries were disposed in 2017 while operations for its onshore drilling rigs have ceased.

• Underestimated, hence undervalued. Post demerger from UMWOG, UMWH's net gearing has improved to 43% end-Sep 2017 from 95% in end-FY17.  Its refreshed balance sheet has put the latter in a better position to secure debt funding for its existing core businesses. With earnings recovery in sight, we believe that UMWH will likely revert to its previous dividend guidelines, paying out at least 50% of net earnings. We have assumed a 50% DPR in our forecasts for FY18-FY19, translating to a yield of 2.5% for FY18 based on yesterday's closing share price. Elsewhere, PER valuations are undemanding based on our earnings growth trajectory, with valuations supported by SOP.

 

 

 

 

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