Investment Highlights

• We maintain our HOLD call on UMW Holdings (UMWH) with an unchanged SOP-derived fair value of RM2.40 (Exhibit 4), based on a FY21F PE of 10x for its motor segment.
• We raise our UMWH’s FY20F core net profit forecast by 39% to account for: i) higher Toyota sales volume assumptions due to new model launches in 4QFY20 i.e. the Hilux, Yaris and Vios; and ii) a slight margin expansion due to successful cost-optimization measures (as per guided in the analyst briefing last night). We make no changes to our FY21–22F earnings estimates.
• UMWH’s 9M20 core net profit of RM95.6mil was above ours, but within consensus expectations, accounting for 91% of ours and 70% of consensus full-year forecasts respectively. YoY, 9M20 core net profit plunged 62%.
• UMWH registered a 9M20 revenue of RM6.3bil, which was a 27% YoY decrease. The poorer performance was largely attributed to: i) lower revenue contribution from the automotive segment; and ii) weaker equipment segment contribution due to the MCO – which resulted in closures of dealerships, showrooms and manufacturing plants nationwide.
• To recap, Toyota sold 36.8K units in 9M20 (-23% YoY) vs. 47.6K units in 9M19. Toyota’s market share in 9M20 was 10.8%. For the automotive segment, the group recorded a lower 9M20 revenue of RM4.8bil (-30% YoY) due to the smaller number of vehicles sold. Sales and production volume were severely impacted by the MCO which took effect on 18 March, with gradual reopenings of dealerships starting from 13 May. The automotive segment’s 9M20 net profit took a massive dive to RM127.7mil (-72% YoY).
• We noted a drop in 9M20 associate earnings to RM96.5mil (-57% YoY) and we suspect that this was due to the weaker performance from Perodua. Perodua sold a total of 145.0K units in 9M20 vs. 178.8K units in 9M19 (-19% YoY) and we believe that the lower Perodua sales volume was a result of the nationwide MCO, although it is partially mitigated by the SST exemption.
• The M&E division registered a marginally lower 9M20 revenue of RM819.4mil (-8% YoY) but a higher net profit of RM24.1mil (+91% YoY). This was attributed to higher production of fan cases in the aerospace segment, which we think would improve margins via economies of scale, in addition to the group’s measures to further improve its profitability through cost-containment measures.
• The group guided that production of the Trent 7000 has commenced in late Sept 2020, with its first deliveries executed in October 2020.
• Key highlights from the analyst briefing:
  1. We gather that there will be multiple Toyota SUV launches in 2021, which will be a combination of both CKD and CBU models. However, management remained tight-lipped on specifics and the exact number of new launches.
  2. Management reiterated that the A-segment Perodua SUV, more popularly known as the D55L, will be launched in “early 2021”, which we suspect would be in 1QCY21. We do not expect the model to be a direct competitor to the Proton X50 as we gather that the dimension of the vehicle is much smaller, coupled with a lower price point.
  3. Management has hinted that the aerospace division will face a bumpy journey in 4Q20 and FY21, largely attributed to the down cycle of the global aviation industry due to the Covid-19 pandemic, which has led to a negative demand shock for plane parts, including fan casings. With that, management in currently studying the feasibility of locking in new customers (other than Rolls-Royce) to maintain the aerospace division’s earnings visibility, but nothing has been confirmed yet.
  4. The group has guided for a QoQ growth in 4QFY20, as demand for both Toyota and Perodua vehicles remained robust – thanks to the SST exemption. However, we think that the growth in 4Q profits will be mitigated by the semi-annual perpetual sukuk interest repayment of RM34.9mil (due every 2Q and 4Q annually) which will be recognized net of tax, along with minority interest line in the income statement.

Source: AmInvest Research - 26 Nov 2020