Investment Highlights

• We maintain our HOLD call on UMW with an unchanged FV of RM5.49/share based on sum-of-parts (SOP) valuation on an unchanged FY19F PE of 10.0x on its automotive segment.

• Key salient points from our visit to the group’s Bukit Raja plant on Monday:

1) Cost savings to be extracted from increased localization of content and automation. The new plant in Bukit Raja will focus on production of the recently launched Toyota Vios and the upcoming Toyota Yaris hatchback. The localization of content (in terms of value) for the Vios will be raised to 80% from 58%, and this is expected to minimize the group’s exposure to forex fluctuations.

UMW plans to sell 30K units of the Vios which will account for 40% of its total vehicle sales target of 75K units in FY19F. We believe that the increase in localization will improve the group’s profit margins positively.

Furthermore, management guided that there will be an increase in automation by 30% for the Bukit Raja plant as compared to the Shah Alam factory. This will contribute to a lower occurrence of defects and the use of lesser manpower. We expect the group to benefit from cost savings from both the increase in content localization and automation. We believe that the group’s priorities are to improve sales volume to regain market share while trying to increase efficiency in operating costs for their volumedriven cars.As we have already factored in the improvements in profitability margins into our estimates, we are leaving our forecasts unchanged.

Recall that the group targets a dramatic 15% increase in total sales volume to 75K units in FY19. For our estimates, we have only projected a sales growth of 8% to 70.8K units. We believe that the general market outlook is still not as vibrant as what the company is expecting.

2) More specific focus for plants to produce vehicles. The Bukit Raja plant currently focuses on producing B segment vehicles (Vios and Yaris). It can be expanded to also manufacture C segment vehicles (up till Corolla Altis and C-HR) if the group aspires to do so. However, management highlighted that it will be inefficient to mix vehicles from different segments into the same production line.

We gather that manufacturing costs will rise if frequent adjustments have to be made to build vehicles from nonidentical segments. Arising from this, the Shah Alam plant will focus on the production of commercial vehicles while the Bukit Raja one will manufacture passenger vehicles.

With the possibility of expanding its Bukit Raja plant in the long term, the group guided that it will be able to raise the capacity to produce new passenger vehicles at minimal investment costs. This is because the plant has plenty of space with ready equipment for an annual capacity of up to 100K units. However, we do not foresee this to happen anytime soon as the current demand for Toyota passenger vehicles is still less than robust.

• We believe that the growth this year will rely heavily on a higher sales volume for Toyota, the continuation of support from Perodua’s strong sales of Myvi and introduction of the Aruz. Also, growth will be dependent on the continued improvement in its M&E segment as the aerospace unit gains production momentum with an eye to break even in 2HFY20.

Source: AmInvest Research - 12 Mar 2019