Nowhere to hide Struggles on all fronts

Transcription

1 UMW RM SELL Jian Bo Gan, CFA jian.bo.gan@clsa.com AC Tan February 2016 Malaysia Autos Reuters Bloomberg UMWS.KL UMWH MK Priced on 25 February 2016 KLSE 1, M hi/lo RM11.14/ M price target RM5.40 ±% potential -22% Shares in issue 1,168.3m Free float (est.) 31.1% Market cap US$1,926m 3M average daily volume RM7.6m (US$1.8m) Foreign s'holding 12.6% Major shareholders PNB Managed Unit Trust Funds 50.9% EPF 18.0% Stock performance (%) 1M 3M 12M Absolute 2.5 (15.2) (36.8) Relative 0.5 (13.9) (30.8) Abs (US$) 4.4 (14.7) (45.4) 12.7 (RM) Source: Bloomberg (%) 5.9 Feb-14 Aug-14 Feb-15 Aug-15 UMW (LHS) Rel to Comp (RHS) Nowhere to hide Struggles on all fronts UMW s challenges were clearly demonstrated in its 4Q15 earnings. Its core divisions all struggled, dragging core earnings down 33% YoY. Headwinds facing the autos business are unlikely to abate in 2016, while further O&G impairments look inevitable. At 32x 16CL and 23x 17CL PE, valuations look extremely overstretched. We cut CL EPS by 12-16% and reiterate our SELL call with a lower RM5.40 TP (from RM5.80). A big MISS UMW posted a headline loss of RM286m in 4Q15 on the back of a RM338m asset and goodwill impairment for the O&G division. Normalised net profit were nonetheless still down 33% YoY, led by weakness for auto, equipment and O&G. Full-year core earnings were thus 54% lower YoY, representing just 78% of our 2015 forecast. Autos lacking competitiveness in 2016 Autos, the largest profit contributor, saw PBT slump 42% YoY in 2015 amid a 7.5% fall in volumes, aggressive marketing strategies and a weak Ringgit. Toyota struggled with the lack of new models in 2015 and the market-share loss to other Japanese marques should persist in January 2016 data showed Toyota sales plunging 26% YoY (-77% MoM) after preloading purchases in December 2015, sharper than the industry s 12% fall. Competitors Honda and in particular Mazda continued its outperformance. O&G falling into an abyss What used to be a bright star, in our view, has fallen into an abyss as 55% subsidiary UMW O&G posted its 2 nd consecutive operational loss. Charter rates have plummeted further while low levels of utilisation are exacerbating the division s troubles. UMW O&G built its fleet during the peak oil cycle, and with 4Q15 s impairment just 6% of PP&E, further impairments look inevitable. Cut CL earnings by 12-16%; SELL with 22% implied downside We cut CL earnings by 12-16% amid weaker O&G prospects and lower equipment division growth. ROEs are just 4-6% over the next two years, while dividends have fallen 50% to its lowest in years. We reiterate our SELL call with a lower SOTP-based target price of RM5.40 (prior RM5.80). Financials Year to 31 December 14A 15A 16CL 17CL 18CL Revenue (RMm) 14,959 14,420 13,701 14,112 14,477 Rev forecast change (%) - - (1.6) (1.2) - Net profit (RMm) 658 (39) NP forecast change (%) - - (11.8) (15.7) - EPS (sen) 56.3 (3.3) CL/consensus (15) (EPS%) EPS growth (% YoY) 0.8 (105.9) nm PE (x) 12.3 nm Dividend yield (%) ROE (%) 10.2 (0.6) Net debt/equity (%) Change in earnings Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com For important disclosures please refer to page 8.

2 Nowhere to hide Figure 1 UMW: 4Q15 earnings snapshot RM million 4Q15 4Q14 YoY chg 3Q15 QoQ chg Comments Revenue 4,161 3, , Aggressive year-end sales campaigns and -automotive 3,376 2, , anticipated vehicle price increase in equipment (9.2) 475 (15.1) 4Q14 boosted by Myanmar heavy equip demand - oil & gas (59.9) 213 (38.4) Lower charter rates and lower utilisation - manufacturing & engineering (0.8) Higher demand for lubricants and absorbers. Disposed lossmaking India biz in Nov others (60.4) Operating expenses (4,546) (3,551) 28.0 (3,631) 25.2 Operating expenses were higher due to Other operating income (75.8) 164 (84.7) a RM337.7m impairment for the O&G division Operating profit (EBIT) (360) 233 nm 67 nm Excluding impairment, UMW still made an Investment income (8.8) operating loss Finance costs (42) (27) 54.9 (25) 69.2 Associate companies (27.8) 0 nm Other income PBT (334) 290 nm 72 nm -automotive (21.6) Hit by the weak Ringgit - equipment (65.4) 64 (57.2) Demand boosted after resumption of jade mining - oil & gas (411) 84 nm 11 nm Asset and goodwill impairment of RM337.7m - manufacturing & engineering 13 (5) nm 1 nm Disposed lossmaking business in India in November others (212) (185) 14.7 (118) 79.8 Tax (57) (93) (38.0) (44) 29.3 There were tax charges despite losses in 4Q15 Tax rate (%) (17.1%) 31.9% 61.4% due to taxation on profits in some divisions Minority Interests 106 (120) nm (14) nm Net profit (286) 77 nm 14 nm Excluding impairments, core net profit fell 33% Core net profit (33.3) amid weakness in auto, equipment and O&G EPS (24.5) 6.6 nm 1.2 nm Core EPS (33.3) DPS (37.5) 0 nm EBIT margin: (8.6%) 6.3% 1.9% PBT margin: (8.0%) 7.9% 2.0% PATAMI margin: (6.9%) 2.1% 0.4%, Company 26 February 2016 jian.bo.gan@clsa.com 2

3 Nowhere to hide Figure 2 UMW: FY15 earnings snapshot RM million 12M15 12M14 YoY chg 15CL Comments Revenue 14,420 14,932 (3.4) 13,106 Stiff competition from new model introductions -automotive 10,710 10,766 (0.5) 9,191 and aggressive marketing strategy by peers - equipment 1,884 1, ,034 Demand grew in Myanmar, PNG and Vietnam - oil & gas 840 1,015 (17.3) 700 Lower charter rates and utilisation - manufacturing & engineering (3.1) 579 Lower demand for absorbers and power steering pumps - others (57.1) 601 Operating expenses (14,398) (13,714) 5.0 (12,323) Other operating income (46.9) (59) Excluding impairments, EBIT fell 67% and was Operating profit (EBIT) 135 1,433 (90.6) 724 just 65% of CLSA forecast Investment income (5.1) 141 Finance costs (127) (85) 48.7 (128) Associate companies (6.8) 163 Other income PBT 266 1,621 (83.6) 900 -automotive 858 1,475 (41.8) 872 Hit by the weak Ringgit - equipment Resumption of jade mining raised demand - oil & gas (349) 284 (223.0) (12) Includes RM337.7m impairment - manufacturing & engineering Better performance due to higher profits for lubricants and cost-cutting measures - others (484) (371) 30.6 (329) Tax (260) (408) (36.4) (266) Tax rate (%) 97.9% 25.2% 29.5% Minority Interests (45) (561) (92.0) (253) Net profit (39) 652 (106.0) 382 Autos were in-line but equipment, O&G and Core net profit (54.2) 382 others missed expectations EPS (3.3) 55.8 (106.0) 32.7 FY15 core earnings were just 78% of 15CL Core EPS (54.2) 32.7 DPS (51.2) 30 Dividends were lower than expected, Payout 78% 73% 92% falling 50% EBIT margin: 0.9% 9.6% 5.5% PBT margin: 1.8% 10.9% 6.9% PATAMI margin: (0.3%) 4.4% 2.9%, Company 26 February 2016 jian.bo.gan@clsa.com 3

4 Nowhere to hide Figure 3 Toyota, together with national car maker Proton, has been a big underperformer among major car brands in 2015 Malaysia YoY auto sales growth by marque in % (5) (10) -7.5 (15) Industry Proton Toyota Nissan Perodua Honda Mazda, MAA Toyota sales fell dramatically in January 2016 after preloading purchases in December Toyota sales were down 26% YoY (-77% MoM) Figure 4 Malaysia YoY auto sales growth in January % (10) -3.3 (20) (30) (40) Industry Toyota Nissan Proton Honda Perodua Mazda, MAA 26 February 2016 jian.bo.gan@clsa.com 4

5 Nowhere to hide Figure 5 Figure 6 Malaysia auto sales market share in 2014 Malaysia auto sales market share in 2015 Others 17% Proton 17% Others 15% Proton 15% Honda 12% Honda 14% Perodua 29% Toyota 16% Nissan 7% Mazda 2% Perodua 32% Toyota 15% Nissan 7% Mazda 2%, MAA, MAA Figure 7 Figure 8 RM:US$ - c.60% of content cost is in US dollars RM:US$ annual average 4.60 RM:US$ Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16, Bloomberg, Bloomberg 5.0 RM:US$ CL 17CL 26 February 2016 jian.bo.gan@clsa.com 5

6 Nowhere to hide Figure 9 UMW: sum-of-the-parts (SOTP) valuation 17CL net earnings (RMm) PE / DCF Ownership RNAV Comment: (PE multiple, DCF value) (RMm) Automotive % 3,141 51%-owned Toyota + 38%-owned Perodua contribution UMW-OG (oil & gas) 2 1,073 55% 590 Post-IPO (55%) contribution; equivalent to RM0.50 per UMW-OG share Equipment + M&E + noncore oil & gas/"others"/value Group % 2,402 Equipment and M&E are mature, low-growth divisions; "others" which is mostly non-core oil & gas assets has been loss-making Pre-cash RNAV 6,133 Net cash (holding co, estimate): 215 Net debt of RM645m at holding co + repayment of RM860m owed by subsidiaries to UMW Total RNAV: 6,348 Equivalent to 18x 17CL earnings; premium multiples for oil & gas division takes the blended group average higher RNAV per share: (RM) 5.40 Figure 10 UMW Oil & Gas: sum-of-the-parts (SOTP) valuation Segment Method Drilling rigs NAV 1,074 WACC 8.7% HWUs Book value 32 Volatile earnings from low utilisation Oilfield services 5 17CL PER 27 Mid cap industry multiples Equity value of entities 1,133 Shares outstanding 2,162 Price per share PER (21.8) 2016 EV/Ebitda PB 0.3 Valuation details Our SOTP valuation for UMW, based on 17CL earnings/valuation base, stands at RM5.40 per share or 25x/18x 16CL/17CL earnings. The non-oil & gas divisions are valued on PE multiples in line with sector peer average (on 2017 earnings) while UMW-OG is valued on DCF (equivalent RM0.50/share valuation) as per CL coverage of the stock. Investment risks Competition in the Malaysian car sector is stiff, as evidenced by the more than 70 models launched over 2013/14 for an auto market which sells less than 700,000 new vehicles per year. The resulting strains on A&P and discounting pose downside risk to margins (though increased localisation would be a mitigating factor via lower excise duties). Perodua has invested heavily (RM1.1bn) in its state-of-the-art Rawang plant which is meant to be both the manufacturing centre for its EEV range as well as the Asean export base for partner Daihatsu. Any sales shortfall would eat into margins. 26 February 2016 jian.bo.gan@clsa.com 6

7 Nowhere to hide Weakness in 2015 should extend into 16CL, with earnings increasing only due to provisions in 2015 Cash balance should decline in line with weaker profitability Balance sheet remains reasonably healthy Margins look set to fall this year, with net margins at less than 2% in 16CL Summary financials Year to 31 December 2014A 2015A 2016CL 2017CL 2018CL Summary P&L forecast (RMm) Revenue 14,959 14,420 13,701 14,112 14,477 Op Ebitda 1, ,024 1,132 Op Ebit 1, Interest income Interest expense (82) (127) (140) (129) (99) Other items Profit before tax 1, Taxation (409) (260) (175) (206) (210) Minorities/Pref divs (554) (45) (101) (135) (135) Net profit 658 (39) Summary cashflow forecast (RMm) Operating profit 1, Operating adjustments Depreciation/amortisation Working capital changes (89) (51) (46) Net interest/taxes/other (458) (753) (306) (286) (305) Net operating cashflow 1, Capital expenditure (2,176) (2,169) (680) (680) (681) Free cashflow (896) (1,794) (50) 7 99 Acq/inv/disposals (50) (50) (50) (50) (50) Int, invt & associate div 1, Net investing cashflow (799) (1,904) (447) (413) (414) Increase in loans 1,195 1, Dividends (894) (641) (452) (557) (631) Net equity raised/other 105 (321) Net financing cashflow (442) (547) (621) Incr/(decr) in net cash 888 (654) (260) (273) (255) Exch rate movements Opening cash 2,483 3,376 2,740 2,485 2,218 Closing cash 3,376 2,728 2,485 2,218 1,969 Summary balance sheet forecast (RMm) Cash & equivalents 3,376 2,728 2,485 2,218 1,969 Debtors Inventories 1,835 1,892 1,797 1,851 1,899 Other current assets 3,323 2,949 2,862 2,912 2,956 Fixed assets 5,646 8,133 8,320 8,501 8,676 Intangible assets Other term assets 2,221 2,341 2,463 2,601 2,748 Total assets 16,439 18,081 17,967 18,122 18,287 Short-term debt 2,269 3,238 3,238 3,238 3,238 Creditors 2,119 2,230 2,119 2,183 2,239 Other current liabs Long-term debt/cbs 1,914 2,783 2,783 2,783 2,783 Provisions/other LT liabs Minorities/other equity 2,853 2,827 2,878 2,945 3,012 Shareholder funds 6,590 6,397 6,380 6,379 6,421 Total liabs & equity 16,439 18,081 17,967 18,122 18,287 Ratio analysis Revenue growth (% YoY) 7.2 (3.6) (5.0) Ebitda growth (% YoY) 12.7 (50.7) (2.5) Ebitda margin (%) Net profit margin (%) 4.4 (0.3) Dividend payout (%) Effective tax rate (%) Ebitda/net int exp (x) Net debt/equity (%) ROE (%) 10.2 (0.6) ROIC (%) EVA /IC (%) 5.8 (6.1) (4.8) (3.9) (3.3) 26 February 2016 jian.bo.gan@clsa.com 7

8 Important disclosures Companies mentioned UMW (UMWH MK - RM SELL) Honda Motor (7267 JP - 2,868 - BUY) Mazda (7261 JP - 1,560 - BUY) Perodua (N-R) Proton (N-R) Toyota Motor (7203 JP - 5,931 - BUY) UMW Oil & Gas (UMWOG MK - RM SELL) Analyst certification The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. Important disclosures Recommendation history of UMW Holdings Bhd UMWH MK Stock price (RM) Jian Bo Gan, CFA Other analysts No coverage BUY U-PF N-R O-PF SELL May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 Date Rec Target Date Rec Target 26 Jan 2016 SELL Sep 2014 O-PF Aug 2015 SELL Jun 2014 U-PF Jul 2015 SELL Apr 2014 U-PF Jun 2015 SELL Mar 2014 SELL Mar 2015 SELL Nov 2013 SELL Dec 2014 O-PF Sep 2013 SELL Nov 2014 BUY February 2016 jian.bo.gan@clsa.com 8

9 Important disclosures Recommendation history of Honda Motor Co Ltd 7267 JP Stock price ( ) 5,000 4,500 Christopher Richter Other analysts No coverage BUY U-PF N-R O-PF SELL 4,000 3,500 3,000 Date Rec Target Date Rec Target 17 Feb 2016 BUY 4, Apr 2014 BUY 4, Jan 2016 BUY 4, Feb 2014 BUY 5, Nov 2015 O-PF 4, Jan 2014 BUY 4, Oct 2015 BUY 4, Dec 2013 O-PF 4, Apr 2015 BUY 4, Oct 2013 O-PF 4, Jan 2015 BUY 4, Jun 2013 BUY 4, Oct 2014 BUY 4, Apr 2013 O-PF 4, Jun 2014 BUY 4, May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 Recommendation history of Mazda Motor Corp 7261 JP Stock price ( ) 3,000 2,500 Christopher Richter Other analysts No coverage BUY U-PF N-R O-PF SELL 2,000 1,500 Date Rec Target Date Rec Target 17 Feb 2016 BUY 2, Apr 2014 U-PF 2, Nov 2015 BUY 3, Feb 2014 U-PF 2, Sep 2015 BUY 2, Jan 2014 SELL 2, Feb 2015 BUY 2, Oct 2013 SELL 2, Oct 2014 U-PF 2, Jul 2013 SELL 1, Jul 2014 U-PF 2, Apr 2013 O-PF 1, May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan February 2016 jian.bo.gan@clsa.com 9

10 Important disclosures Recommendation history of Toyota Motor Corp 7203 JP Stock price ( ) 9,000 8,000 Christopher Richter Other analysts No coverage BUY U-PF N-R O-PF SELL 7,000 6,000 5,000 Date Rec Target Date Rec Target 17 Feb 2016 BUY 8, Oct 2014 BUY 7, Feb 2016 BUY 8, Aug 2014 BUY 7, Nov 2015 O-PF 8, Jun 2014 BUY 6, Aug 2015 BUY 8, Apr 2014 BUY 7, May 2015 O-PF 9, Dec 2013 BUY 7, Mar 2015 O-PF 9, May 2013 BUY 7, Feb 2015 O-PF 8, May 2013 BUY 7, Nov 2014 BUY 8, Apr 2013 BUY 6, Nov 2014 O-PF 7, Apr 2013 BUY 6, May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 Recommendation history of UMW Oil & Gas Corp Bhd UMWOG MK Stock price (RM) AC Tan Other analysts No coverage BUY U-PF N-R O-PF SELL 2 1 Date Rec Target Date Rec Target 24 Feb 2016 SELL Dec 2014 SELL Aug 2015 SELL Sep 2014 SELL Jul 2015 SELL Feb 2014 SELL May 2015 SELL Oct 2013 SELL Feb 2015 SELL 2.22 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 The policy of CLSA (which for the purpose of this disclosure includes subsidiaries of CLSA B.V. and CLSA Americas, LLC ("CLSA Americas")), and Credit Agricole Securities (Taiwan) Company Limited ( CA Taiwan ) is to 26 February 2016 jian.bo.gan@clsa.com 10

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12 Important disclosures only /CA Taiwan only Universe: Overall rating distribution : Buy / Outperform - CLSA: 64.09%; CLSA Americas only: 62.08%; CA Taiwan only: 65.15%, Underperform / Sell - CLSA: 35.84%; CLSA Americas only: 37.92%; CA Taiwan only: 34.85%, Restricted - CLSA: 0.00%; CLSA Americas only: 0.00%; CA Taiwan only: 0.00%. Data as of 31 December Investment banking clients as a % of rating category: Buy / Outperform - CLSA: 2.78%; CLSA Americas only: 0.00%; CA Taiwan only: 0.00%, Underperform / Sell - CLSA: 1.66%; CLSA Americas only: 0.00%; CA Taiwan only: 0.00%, Restricted - CLSA: 0.00%; CLSA Americas only: 0.00%; CA Taiwan only: 0.00%. Data for 12- month period ending 31 December There are no numbers for Hold/Neutral as CLSA/CLSA Americas/CA Taiwan do not have such investment rankings. 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14 Important disclosures distributed by CLSA Singapore Pte Ltd (Company Registration No.: W), a Capital Markets Services license holder to deal in securities and an exempt financial adviser, solely to persons who qualify as institutional investor, accredited investor or expert investor, as defined in Section 4A(1) of the Securities and Futures Act (Cap 289). Pursuant to Regulations 33, 34, 35 and 36 of the Financial Advisers (Amendment) Regulations 2005 of the Financial Advisers Act (Cap 110) with regards to an accredited investor, institutional investor, expert investor or overseas investor, Sections 25, 27 and 36 of the Financial Adviser Act (Cap 110) shall not apply to CLSA Singapore Pte Ltd. Please contact CLSA Singapore Pte Ltd (telephone No.: ) in connection with queries on the report. [MCI (P) 013/11/2015] The analysts/contributors to this publication/communication may be employed by any relevant CLSA entity, CA Taiwan or a subsidiary of CITIC Securities Company Limited which is different from the entity that distributes the publication/communication in the respective jurisdictions. MSCI-sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by CLSA. EVA is a registered trademark of Stern, Stewart & Co. Unless otherwise noted in the source, "CL" in charts and tables stands for CLSA/CLSA Americas estimates and CT stands for CA Taiwan estimates. Research subscriptions To change your report distribution requirements, please contact your CLSA sales representative or us at cib@clsa.com. You can also fine-tune your Research Alert preferences at 26 February 2016 jian.bo.gan@clsa.com 14