CIMB Research upgrades UMW to Hold as worst is over

UMW Land president Dr Wafi Nazrin Abdul Hamid (pic) said this was a 30-year contract to produce fan-casing for Rolls Royce engines.

KUALA LUMPUR: CIMB Equities Research has upgraded UMW Holdings Bhd from Reduce to Hold as it raised the target price from RM4.90 to RM5.90.

The research house said on Wednesday it thinks the worst is over following the disposal of UMW Oil and Gas (UMW-OG) and ongoing efforts to dispose non-listed oil and gas (O&G) assets. 

“We raise our target price to RM5.90 as we roll over our valuation to FY19F, still based on 14 times P/E, 10% premium to its FY09FY14 historical mean of 13 times. 

“Key upside risks are accelerated disposal of non-listed O&G and strengthening of the ringgit, while key downside risks are delayed disposal of non-listed O&G and depreciation of the ringgit against US$,” it said.

CIMB Research was encouraged to learn that the group is expecting minimal operating losses from the remaining non-listed O&G assets following the complete cessation of its loss-making Arabian Drilling Services in Oman.  

The research house said the non-listed O&G assets posted wider pretax losses of RM70.6mil in 2Q17 vs. RM15mil in 1Q17 due to lower drilling activities and equipment demand due to lower crude oil prices and one-off cost of RM55mil related to the cessation of operations in Oman. 

UMW also completed the disposal of one of the non-listed O&G assets in China in May 2017. 

“Overall, the group is on track to complete the disposal of all its 16 non-listed O&G assets in 2018. 

“In addition, we also expect stronger earnings from the automotive division on the back of higher (3.3% half-on-half) volume growth in 2H17. 

“We see an encouraging outlook for the auto division due to favourable forex from the strengthening of ringgit in the current quarter,” it said. 

CIMB Research said moreover, the group is planning to open bookings for the highly anticipated sports utility vehicle, Toyota C-HR in October 2017. 

The new model will allow UMW to compete in the compact SUV segment, which is currently dominated by Honda HR-V and Mazda CX-3.  

“UMW recently announced that it is planning to form a strategic partnership with Komatsu (Japan) to grow the market penetration of Komatsu’s products in Malaysia, Singapore, Myanmar and Papua New Guinea. 

“Under the partnership, UMW will hold a 74% stake, while Komatsu the remaining 26%. We learnt that this partnership will allow UMW to have access to advanced heavy equipment with better pricing from the principal,” said the research house.  

However, CIMB Research does not expect major earnings from this partnership in the near term.  

“Management said the group is on track to deliver its first engine fan-case in October 2017. However, we expect the aerospace division to remain in the red in FY17F due to start-up costs. 

“The group incurred RM25mil pretax loss in 1H17 mainly due to pre-operating expenses. We expect the losses to narrow by half in 2H17F once the group starts product delivery. However, we only expect meaningful earnings in FY19F,” it said.


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