KUALA LUMPUR: CIMB Equities Research has downgraded UMW Holdings from Hold to Reduce with a lower target price of RM5.30 after it revised the earning outlook.
The research house said the lower sum-of-parts based target price of RM5.30 was to account for a lower valuation for UMW Oil and Gas (UMW-OG) and the surge in UMW’s share price year-to-date.
“We see further downside to its share price if earnings from its non-listed oil and gas assets continue to drag over the next few quarters and there are higher start-up costs for its aerospace division. Switch to Bermaz,” it said.
UMW’s revenue in 1Q17 surged 27.5% on-year due to higher contribution from the automotive segment (+40.8% on-year). Oil and gas revenue fell by 15.4% on-year due to lower utilisation.
Overall, UMW posted a narrower core net loss of RM4.4mil in 1Q17 vs. RM10.5mil in 1Q16 due to higher net profit from automotive and equipment and lower losses from non-listed oil and gas. As expected, there was no dividend declared in 1Q17.
“Toyota sales volume surged 61.5% on-year in 1Q17 on the back of price reduction for its
Toyota Fortuner model following its inclusion as an energy efficient vehicle and new model launches such as the Altis, Innova and Hilux.
“UMW is targeting 70,000 sales volume in 2017 or 7.5% growth on-year compared to 65,110 units sold in 2016. Meanwhile, its associate, Perusahhan Otomobil Kedua (Perodua) also posted an encouraging 6.5% volume growth in 1Q17, driven by its latest two new models, Axia and Bezza,” it said.
UMW-OG posted a wider net loss of RM58mil in 1Q17 compared to RM36.2mil in 1Q16 due to lower rig utilisation given that most of its rigs remain idle.
“Moreover, we estimate that jack-up rigs average charter rates also fell by 16.7% on-year in 1Q17 due to the expiry of earlier higher-priced contracts.
“In addition, the group highlighted that its strategic plan to exit the oil and gas sector remains on track as it expects to complete the de-merger exercise with UMW-OG in July 2017.
“The group aims to progressively exit non-listed oil and gas assets which should be concluded by 2018. Moreover, the group highlighted that the manufacturing of its new airplane engine fan case is progressing well and on track to start shipments in 4Q17.
“We cut FY17-18F EPS by 6%-16% to account for higher losses for UMW-OG in 1H17 and higher opex for the aerospace division.
“Meanwhile, UMW’s share price has risen by 28% since the company announced its plan to exit the oil and gas sector in Jan 2017. Hence, we think the earnings uplift from the de-merger exercise is reflected in its share price,” it said.
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