UMW to see strong earnings rebound in FY18
KUCHING: UMW Holdings Bhd ( UMW) could see a strong earnings rebound in the financial year 2018 ( FY18), underpinned by higher vehicle sales and margin expansion due to the stronger ringgit, analysts observed.
In a re-initiation coverage report on UMW, the research arm of Maybank Investment Bank Bhd ( Maybank IB Research) said: “We believe that the worst is over for UMW, with earnings growth to resume, underpinned by higher vehicle sales and margin expansion, the latter thanks to a much stronger ringgit.
“We project a strong core earnings rebound in FY18 (an increase of 3.3-folds year- on-year), continuing into FY19 (a 44 per cent rise y- o-y).”
The research team also highlighted that the demerger with UMW Oil & Gas Corporation Bhd ( UMWOG) marks a new beginning for UMW, with a strengthened balance sheet to move forward.
It pointed out that while the market is still concerned about the lingering losses at UMW’s noncore O& G operations, it believed that this might have understated the potential recovery at UMW’s automotive division.
“This is the key contributor to the group, at 75 to 80 per cent of group revenue and almost all of its earnings.
“We note that UMW has, in recent times, seen some progress in its plans to rationalise these noncore assets – two non- core subsidiaries were disposed in 2017 while operations for its onshore drilling rigs have ceased,” it added.
“For FY18, we project a 3.3folds y- o-y core earnings growth to RM302 million mainly led the automotive division, underpinned by our forecast for a seven per cent y- o-y Toyota vehicle sales growth and a 2.5ppts margin improvement at the pre-tax levels to 7.5 per cent as we account for a lower average US dollar to ringgit rate of 4.10 compared with 4.30 in 2017.
“At the same time, we expect narrower losses at Manufacturing & Engineering ( M& E) as the delivery of the aerospace fan cases commences.
“Meanwhile, we also expect losses at the non- core division to narrow post the disposal of two non- core subsidiaries and the cessation of onshore drilling rigs, both in 2017,” it projected.
As for FY19, Maybank IB Researc expect UMW’s net profit to grow by another 44 per cent y- o-y to RM436 million, also driven by its automotive segment.
“Completion of the new Toyota production plant by end-2018 would contribute to (the) automotive (segment) earnings with new CKD products (C-HR expected to be the first model to be produced) at better efficiency due to a much higher automation adopted in the new plant.
“For this, we project a 11 per cent y- o-y Toyota sales growth and a slight pre-tax margin expansion to 7.9 per cent ( 0.4ppts y- o-y).
“Elsewhere, M& E should reverse its losses and supplement the group with a small profit on higher delivery of the aerospace fan cases to Rolls-Royce.
“Similar to FY18, we also expect UMW to make progress in the rationalisation plans of its non- core assets, gradually narrowing the losses for these non- core operations,” it said.
All in, Maybank IB Research resumed its coverage on UMW with a ‘buy’ call.
“Post demerger from UMWOG, UMW’s net gearing has improved to 43 per cent end- September 2017 from 95 per cent in end-FY17.”