Investment Highlights

• We maintain HOLD on UMW Holdings but cut our SOP-based FV to RM5.60/share (from RM6.29/share). We trim our FY19-20 projections by 1-4% with a lower sales projection for Toyota and Perodua, and lowered our PE multiples for both units.

• The stock has tumbled dramatically by up to 21% since the end of August. We believe that this was mainly due to: (1) market expectations that it will not close the deal for the majority stake in MBM Resources successfully, by the deadline of end-October and (2) the weaker prospects for auto sales and margins from the final quarter of this year.

• The stock took a hit yesterday (down 5.6%) amid news that Perodua sales fell a multi-year low of 9.5K in Sept (down 47% MoM /34% YoY) due to a supply disruption in the Myvi that began in August. We believe this is a short-term issue as the Myvi production returns today and sales of the model should normalize from this month. Perodua is still supported by the 22K in unfulfilled orders for the Myvi as of end-Sept.

• The auto segment faces hazier days after a strong 1HFY18 that benefited from a YoY strengthening of the ringgit and support from the new Perodua model. Both Toyota and Perodua saw sales spike during the tax holiday although the latter saw a small dent in Aug due to the aforementioned supply disruption.

• We are projecting a sales growth of 2.0%/3.0% for Toyota/Perodua in FY19, down from 3.0%/4.0% before. We have also lowered their respective PEs for the SOP-based FV to 10x/11x from 11x/13x previously, in tandem with weaker sales and margins expected from the final quarter.

• Both companies will line up defences for early 2019: Toyota targets to launch a new Camry by the end of this year (the model accounts for about 6% of its TIV), and Perodua has marked its SUV for launch in February 2019.

• For FY19, we also project a modest growth in UMW’s other two core segments. The equipment segment will be supported by the formation of JV with Komatsu to improve market penetration and competitiveness. The M&E segment should return to the black as the aerospace unit breaks even next year.

• As before, our SOP includes the additional 10% in Perodua that we expect UMW to acquire from PNB Equity Resource Corp (PERC) but not the 22.6% it would reap from acquiring MBM. The higher stake (of 48%) still deprives UMW from a controlling position in Perodua, which is in line with Daihatsu’s main contention on the deal.

• We reiterate that should the deal fail to materialize, it would be negative for UMW as it would have missed the opportunity to take up additional shares in Perodua at a low price.

Source: AmInvest Research - 5 Oct 2018