O&G continues to drag UMW’s performance, auto sees slowdown

KUCHING: UMW Holdings Bhd’s ( UMW) performance continued to be dragged down by its oil and gas( O& G) division while its auto division is showing signs of slowing down, analysts say.

In a report, Aff in Hwang Investment Bank Bhd’s research arm ( Affin Hwang Capital) noted that UMW’s third quarter of 2016 (3Q16) revenue was f lat at RM 2.8 billion quarteronquarter( q- o-q) with automotive sales inching up four per cent.

However, it pointed out that this was offset by the other business segments namely equipment ( down 2.4 per cent), manufacturing and engineering (down 7.9 per cent) and O& G( down 16.9 per cent).

“Core net losses widened in 3 Q 16 as the O& G division continued to be a drag to earnings with only NAGA 1 partially working in 3Q16,” it said.

Looking ahead, A ff in Hwang Capital said UMW’s automotive sales would likely remain challenging on the back of the weak consumer sentiment while the equipment segment should remain weak due to low activity levels in the mining and logging sectors.

Meanwhile, sluggish demand would continue to impact the manufacturing and engineering segment, but support is likely from increased European market exports and OEM sales, it added.

For UMW O& G division, the research team believed 4 Q 16 will see are bound from 3Q16 low as NAGA 6 and 8 have been deployed for work.

“However, the outlook for drilling market remains soft,” it added.

In another note, the research arm of Kenanga Investment B an kBhd ( Kenanga Research) noted that UMW’s management maintained their combined sales estimate for both Perodua and UMW of 286,000 units, broadly in line with its sales volume assumptions for FY16.

“With the launch of the Pero du aBezzaa swell as other fresh Toyota models to offer, we expect to see some recovery in terms of unit sales for the group, which should make up for the weaker sales garnered during the first half of the year.

“However, margins are expected to continue to be thin given the prevailing unfavourable forex,” it opined.

On the O& G segment, Kenanga Research continued to anticipate weakness in the short to medium term judging by the softness and uncertainty in oil prices seen recently.

“Hence, oil majors may continue to keep their exploration activities at minimal levels. At this juncture, five rigs ( NAGA 1, 3, 4, 5 and 7) are not being chartered with two other rigs only recent ly beginning their charters while another only commencing in 2Q17.

“As such, high overhead costs with lower returns are expected to stress the group’s FY16 segment earnings,” it said.

Overall, Kenan ga Research maintained its ‘ underperform’ rating and it forecast losses for FY16 and reduced its FY17E core PATAMI (down 43 per cent) as it expected an extended drag from the weakness in the O& G segment, possibly only seeing a meaningful recovery in 2H17 where three rigs are anticipated to be chartered.

A ff in Hwang Capital maintained its‘ sell’ recommendation and retained its forecast, pending updates from UMW.