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Wednesday, January 25, 2017

UMW: A Long Recovery Ahead

Background

UMW was identified by PNB as one of the strategic listed companies in its investment portfolio that will come under corporate exercise in order to boost PNB's domestic public equity performance. In another word, UMW share price will likely to rise after some form of restructuring. This was announced in November under its Strategic Plan 2017-2022 (here).

Last week, UMW announced its divestment of its listed O&G vehicle, UMWOG plus the sale/transfer of its unlisted O&G companies to UMWOG (here). The game plan is simple; both parent and subsidiary had been badly dragged down by their O&G business. This losses is reflected in UMWOG's financial and share price performance. Unfortunately it is also dragging down UMW's financial and share price performance.

By splitting the O&G business from its stable, UMW expects its financial performance to improve in the near future. This will lead to an immediate rise in its share price. PNB will immediately benefit from the share price movement while it's shielded from the drop in UMWOG's share price (as UMWOG is still carried on UMW's book). Once UMWOG is divested from UMW to PNB, the investment in UMWOG will be booked in at spin-off price (with no loss to PNB). Over the next few quarters or years, UMWOG's financial performance should recover and its share price should go higher. At this point, the higher UMWOG share prices will lead to the second round of benefit to PNB.

Financial Performance

UMW reported net losses in 3 of the last 4 quarters. As a result, its net loss totaled RM410 million for the last 4 quarters as compared to net profit of RM77 million in the preceding 4 quarters.


Table 1: UMW's last 8 quarterly results

For QE30/9/2016, overall revenue was slightly higher (up RM10 million) but the group reported a LBT of RM122 million as compared to PBT of RM45 million previously. This was mainly due to increased LBT from UMWOG (from RM64 million to RM133 million).

Table 2: UMW's segmental results for QE30/9/2016 & QE30/6/2016

For 9-month ended 30/9/2016, overall revenue dropped RM2.36 billion due to lower revenue from all the divisions (especially Automotive, Equipment & UMWOG). This led to a LBT of RM56 million compared to a PBT of RM600 million previously. The 3 worst performing divisions are: Automotive, Equipment & UMWOG.


Table 2: UMW's segmental results for 9-month ended 30/9/2016 & QE30/9/2015

On the graph, the plunge in revenue is clearly visible but profits began to drop in early 2014.


Graph: UMW's last 38 quarters' results

Financial Position

As reported in the Edge Daily, the demerger of UMWOG will help to lower UMW's gearing ratio from 0.7x to 0.5x.

Valuation

UMW (closed at RM5.38 in the morning session) is now trading at a PBR of 1 time. As its earning is negative, it is meaningless to compute its PER. Dividend for last 4 quarters amounted to 10 sen- a drop from 26 sen previously. If dividend were to recover back to 26 sen, the dividend yield of 4.8% would be a big draw for UMW. [Note: In its latest report, CIMB revised the rating for UMW from REDUCE to ADD and raised its fair value for UMW to RM5.10 (here).]

Technical Outlook

UMW has dropped a long way from around RM13.50 in early 2013 to a recent low of RM4.50. That low was very close to its long-term uptrend line.


Chart 1: UMW's monthly chart as at Jan 23, 2017 (Source: MalaysiaStock.Biz)

UMW has since rebounded off its long-term uptrend line. It may test the strong resistance at the horizontal line at RM5.50-5.60. This resistance coincides with its intermediate downtrend line.
  

Chart 2: UMW's weekly chart as at Jan 23, 2017 (Source: MalaysiaStock.Biz)

Conclusion

Based on expected improvement in financial performance & position (following the demerger of UMWOG) and potential price recovery (after its long decline), UMW could be a good stock for long-term investment.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

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