Investment Highlights

• We retain our BUY recommendation on UMW Holdings (UMWH) with a lower sum-of-parts (SOP) derived fair value (FV) of RM3.90 (from RM4.07) (Exhibit 2). We revise down our 2021F earnings forecasts while raising that of 2022F and 2023F.

• We cut 2021F net profit forecasts by 36.3% to reflect the impact of the longer-than-expected movement control order in 3Q21 but raise UMWH 2022F/2023F earnings by 3.2%/8.0% on higher sales from its all three divisions due to the reopening of the economy. We also update our SOP valuation net debt assumption and roll forward our valuation base year to 2022F. Our revised FV of RM3.90 implies 14.7x PER of 2022F EPS.

• Below are key takeaways from our recent virtual meeting with UMWH management:

1. Good reception on Toyota Corolla Cross CKD. UMW Toyota (UMWT) has garnered three months’ worth of bookings after just one month it opened the booking for the completely knocked down (CKD) Corolla Cross, exceeding our expectations. We expect the model to be competitively priced and will be officially launched in early 2022. We assume UMWT’s sales of 72,000 units for 2022, to be partially driven by the deliveries of the model, implying a modest 4.3% growth.
2. Retiming product launches to minimize chip shortage impact. Due to the overwhelming response on the recently launched Perodua Myvi facelift, Perodua could potentially delay the introduction of the all-new Perodua Alza which was previously expected to make its debut in 1H22. This is to avoid further exacerbating the chip shortage impact that the company currently faces. We forecast Perodua’s sales volume at 240,000 units, implying a 71.4% growth. The low base in 2021 was mainly attributed to supply chain disruptions due to lockdowns and chip shortage that affected Myvi production.
3. Heavy equipment earnings recovery will be driven by the plantation and construction sectors. Fleet renewals by plantation companies given the sustained high crude palm oil price and resumption of construction activities are expected to drive the demand recovery for heavy equipment in Malaysia. Separately, UMWH is set to benefit from Papua New Guinea’s nationwide road development project (Connect PNG) where the government has allocated US$5.7bil on the rolling 20-year programme.
4. UMWT has committed to introducing one new electric vehicle (EV) model every year starting 2022 to take advantage of the tax exemption incentives announced by the government in Budget 2022 as well as providing its customers with EV alternatives. Given the prohibitive pricing of EV in general, we expect UMWT to launch a mid-range model for a start to serve a wider market.

• We like UMWH given that it is a proxy to the economic recovery post-pandemic. All its three divisions i.e. automotive, equipment and manufacturing & engineering are set to benefit from the reopening of the economy. The near-term earnings will be supported by deliveries of the new model launches (Perodua Myvi facelift, Perodua Alza, and Toyota Corolla Cross) as well as the extension of the sales tax exemption.

Source: AmInvest Research - 4 Jan 2022