• We maintain our HOLD call for UMW with a FV or RM5.49/share based on an unchanged FY19F PE of 10.0x on its automotive segment.

• Key points from the group’s analyst briefing on Thursday:

1) Better margins to come on increased localization from the new plant in Bukit Raja. The new plant in Bukit Raja will focus initially on the production of volume-driven models to increase sales and market share. The new Toyota Vios raises the local content for the model to 80% from 58% previously, which we deem should contribute to better margins by minimizing forex exposure. UMW targets a sales volume of 30K units for the Toyota Vios (average sales of 2.5K units/month), accounting for 40% of total sales target of 75K units for Toyota. The plant will also produce the Yaris hatchback eyed for 2QFY19.

2) To continue rationalization of non-core assets and efforts to monetize Serendah land. UMW has 6 (of 16) remaining O&G assets to dispose of. These comprise associates and JVs with a carrying value of RM33mil and subsidiaries worth RM19mil. We commend the progress that has been made and believe these should further refocus operations to the group’s core segments.

Apart from this, the group mentioned that it might ink more deals this year to monetize parcels on Serendah. It has found several potential tenants that it intends to secure in the near future. The group recently signed a MoU with MIDA and Invest Selangor to collaborate on developing the Serendah park into a High Value Manufacturing Park. Up to date, key tenants have taken up 31 acres of the total of 861 acres of the land, where UMW Aerospace’s engine fan case manufacturing facility (24 acres) being the major tenant. In addition, the group further affirmed that there have been strong interest with several deals in the pipeline.

3) A return to dividends. UMW paid out 35% of its net profit in FY18 to mark its return to profit after several years in the red. Management said it would try to meet a payout of 50% of its net profit in the future. We retain a conservative projection of 30% for FY19-20 as UMW still has eyes on expansion for each of its core segments in the coming years.

• We believe growth this year will rely on the ambitious volume target of 75K units for Toyota, continuity of support from Perodua’s strong sales of the Myvi and introduction of the Aruz, and a continued improvement in the M&E segment as the aerospace unit gains momentum in production (with an eye on breakeven for 2HFY2020).

Source: AmInvest Research - 1 Mar 2019