UMW 2Q net profit slumps 47% to RM79.4m, a look into the auto segment

From The Edge Malaysia:

Automotive-oil and gas company UMW HOLDINGS BHD []'s second quarter net profit slumped 47.6% to RM79.43 million from the RM151.73 million a year ago, as spending by consumers and industrial sectors shrank.

The company said on Aug 21 group revenue of RM2.58 billion for 2Q ended June 30, 2009 was RM987.1 million or 27.7% lower than RM3.568 billion a year ago.

"Decline in spending by consumers and industrial sectors due to the global economic downturn resulted in the lower revenue recorded by the automotive, equipment and manufacturing and engineering segments," it said.

UMW said group profit before taxation for 2Q of RM185.5 million, was doen 47.4% or RM169.5 million from RM355.0 million. The weakening of the ringgit against the US dollar and yen also affected profit margins.

"Despite the challenging economic environment, the O&G segment registered a positive variance for both revenue and profit before taxation for the second quarter as contributions from our new local and overseas investments started to flow in," it said.

Delving deeper into the numbers, taking a look at the auto segment, we see the revenues dropping some 25% from 5 billion last year to 3.745 billion. This is a 25% drop in revenues.

This is a genuine catastrophe for UMW. I don't see them recovering so fast as I mentioned a few days ago in the article about Proton. The Toyota part of sales will overwhelm the revenues, although it does have its low cost manufacturer in Perodua.

The fallacy of diversifying products is one line protects you from less risky lines. UMW has gone into the arguable more risky oil sector while expecting its revenue from autos to hold up. The acquisition my prove to be horrible for shareholders.

Actually, they should have acquired a slightly less riskier business line, to balance out the risk that auto revenues should fail. It's widely known that the auto industry is quite a risky industry by itself. This is a lesson for UMW not recognizing what kind of company they are.