Investment Highlights

• We maintain a HOLD and an SOP-based FV of RM5.54/share for UMW with a PE multiple of 10x on its automotive segment. Key points from our meeting with UMW last week:

1) Toyota eyes an eventual return to the top spot in the nonnational market, starting with an aggressive volume target this year. Two key Toyota models open the year, in anticipation of a softer first half: Vios starts deliveries this month, while the Yaris hatchback will see a launch in 2Q.

UMW eyes a 14% sales growth (to 75K this year from 67K in 2018) with 40% of sales to come from the Vios. We project a lower growth of 8% (to 71K) as it will be an uphill battle for Toyota to build and sustain momentum. Toyota leaned heavily on 2018’s tax holiday, deriving 45% of total sales from the 3-month window. In comparison, Honda maintained steady sales beyond the spike of that period.

2) Toyota’s second local plant kick starts this year with production of Vios and Yaris. The opening of the Bukit Raja plant compels UMW to pivot more heavily into volume-focused models with a goal to see break-even for the plant by next year. Bukit Raja will begin with an initial capacity of 50K units/year while Shah Alam pares back to one shift (from a two-shift operation for 75K units/year). It hopes to maintain a utilization rate of 85% for the latter by leaning on demand for the Hilux especially.

We commend UMW’s move to operate the two plants at rates that are practical and to prevent a flooding of the market by way of excess inventory. Beyond this, we are excited at the longer-term prospect of localizing more models. In particular, a CKD version of the C-HR would be a strong catalyst. C-HR saw a fairly strong reception last year (accounting for 7% of domestic Toyota sales with 4.4K units) given its premium pricing (RM150K), and a CKD version would price it closer to the likes of the Honda HR-V and Mazda CX-5.

3) Minimal impact from delays in obtaining the retail prices for cars. Certain players have bemoaned the months-long delay in the government’s decision for car prices. For UMW, this affected the Toyota rush and Perodua Aruz. The Toyota Rush was launched in October (with an indicative price of RM93K) and deliveries have not started as the final price has not been determined, but UMW stressed that the impact to volume is minimal considering the sales target of only 300 units/month (translating to 5% of its FY19 volume target).

Meanwhile, the Perodua Aruz began deliveries last Friday after a fortnight-long delay due to similar concerns. The impact of the Aruz should be more visible from Feb and the model has a solid pipeline of at least 3 months (with reported bookings of 7K units against a target of 2.5K units/month). We project a growth of 1.5% for Perodua this year (similar to the company’s target of 1.7%) anchored to strong reception for the Aruz and Myvi.

4) Aerospace operation eyes breakeven in 2HFY2020. UMW emphasized that the M&E segment will return to the black this year and that the losses from aerospace have progressively declined with a steady ramp-up in its production rate.

Source: AmInvest Research - 4 Feb 2019