Investment Highlights

• We maintain HOLD on UMW Holdings but raise our SOP-based FV to RM5.54/share (from RM5.36) based on an unchanged FY19 PE multiple of 10x on its automotive segment. Our FV was adjusted to include the gain from the land sale in Shah Alam, and higher earnings projections (FY18/19/20 raised by 26%/11%/5%) to account for a stronger showing by its core segments and a slightly higher contribution from its “others” segment. 9MFY19 earnings were above expectations, meeting 98% of our FY projection and 101% of consensus.

• 3QFY18 saw stronger revenue (up 23% YoY) and core net profit on the back of higher Toyota sales from the tax holiday (anchored to the Vios, Hilux and C-HR, which comprised 67% of Toyota sales in 3Q), higher associate earnings that rode on the Perodua Myvi, and a small profit contribution from its M&E segment.

• The profit from M&E segment (of RM9mil) was attributed to better cost management and revenue contribution from the aerospace operation, which began generating sales from 4Q17 but is only envisioned to break even next year. We have factored in a minor profit from M&E in FY19 but expect momentum to pick up from the following year.

• YTD core net profit (up 166% YoY) benefited from stronger numbers by its automotive and equipment segments, as well as lower losses from M&E. Auto benefited from strong Toyota sales during the tax holiday, consistent contributions from Perodua in the past four quarters and a better margin from a stronger ringgit vs. the yen and USD. Recall that the tax holiday was a big boon for Toyota (which reaped 51% of its 10M TIV in June-Aug; vs. 40%/43% for Honda/Nissan).

• UMW also announced the land sale of industrial land (10 lots amounting to 38 acres in Section 15, Shah Alam) for RM288mil cash to Mapletree Investments. This amount will be utilized for its working capital. The price was 3.2% above market values ascribed by an independent valuer and this will result in a one-off gain on disposal of RM171mil based on the total book value of RM116mil as of end-June 2018.

• UMW’s existing operations in Shah Alam comprising several factories for its equipment, lubricants and auto parts manufacturing operations will be moved to Serendah within 3 years to improve activity there and attract more investors to the High-Value Manufacturing Park, which currently houses the aerospace plant.

• We project sales growth of 5%/3% in FY19/20 for Toyota, premised on momentum gradually built on the Rush (launched Oct), Camry (launched end-Nov), Vios (deliveries from Jan) and Yaris (due by endJune 2019).

• We believe UMW earnings will be bolstered by the Toyota launches that are strategically targeting pre-CNY sales, greater earnings clarity from its aerospace operation going forward and the continuing strength in Perodua. Key risks include poorer-thanexpected reception to the key models launched and a weakening MYR.

Source: AmInvest Research - 3 Dec 2018