1) Production of fan cases for Trent 7000 engine to commence in 2QFY20. UMW’s management guided that the production of fan cases for the Trent 7000 engines will begin in 2QFY20. We deem this to be positive as it will lead to higher utilization rate of the plant to deliver higher volumes of fan cases towards meeting its objective of breaking even for the aerospace segment in 2HFY20. Beginning FY21, we see earnings from the aerospace unit to progressively improve. This should eventually lead to a higher contribution of M&E segment’s total earnings than the lubricant and auto components businesses.
2) Expect sluggish production number of fan cases to persist for 2019. Recently, the Rolls-Royce’s (R-R) Trent 1000 engines have been found to be suffering from an earlier-than-expected wear and tear of certain components, resulting in the grounding of some Boeing 787 Dreamliners. This has affected the group’s production line which led to UMW Aerospace reducing its annual production target of fan cases to 70 from 80 units (breakeven: 160 units). Based on our estimates, the group has produced circa 55 units of fan cases in FY18, which is below its production target. As reported in the media, R-R has yet to resolve technical issues on Trent 1000’s engine components. With that, we believe that the demand for fan cases for the engines will remain sluggish for FY19. Production of fan cases for Trent 1000 is anticipated to remain lower than the group’s target in FY19. We expect UMW Aerospace to rely on the commencement of fan cases’ production for the Trent 7000 engines, targeted in 2QFY20, to achieve breakeven for the aerospace business in FY20.
3) Increasing efforts to monetize the Serendah land. Recall that the group recently signed an MoU with MIDA and Invest Selangor to collaborate on developing the Serendah land into a high-value manufacturing park. Up till now, 31 acres of the total 861 acres of the land have been occupied, where UMW Aerospace is currently the major tenant occupying 24 acres. The group could ink more deals this year as it is negotiating several deals to further monetize the Serendah land. Should some of these deals materialize, it will increase the group’s cash reserves, or income via rental.
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Source: AmInvest Research - 5 Apr 2019
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