Investment Highlights

• We reiterate our BUY call on UMWH with the same sum-of-parts (SOP)-derived fair value of RM4.70/share. Our FV implies FY23F PE of 14x, at parity to its 5-year mean. We retain our neutral 3-star ESG rating.

• The group announced that its wholly-owned UMW Aerospace has received a 15-year contract worth RM1bil from Rolls-Royce Plc to manufacture rear cases for Trent 1000 and Trent 7000 aircraft engines. This translates to RM67mil of additional sales for its manufacturing & engineering (M&E) division per year on average. The contract also represents 22% of the group’s market capitalisation. Our channel checks reveal that the contract could only commence in 2025.

• The contract marks the second award from Rolls-Royce since August 2015. UMWH has previously secured a 25+5 year contract to produce fan cases, making the company the first homegrown Tier 1 aero engine component supplier to Rolls-Royce. On a side note, the award comes in line with the government’s National Investment Aspirations (NIA) initiative which has categorised aerospace as one of the 5 key sectors.

• The group will spend RM65mil progressively to set up the chemical milling and related processes for manufacturing purposes at its facility in Serendah. Given its net cash position of nearly RM2bil as at FY22, we believe UMWH will be internally funding the cost. The investment amount of RM65mil is also within our expectations, accounting for 33% of our FY23F capex of RM200mil. We gather that the facility is currently under early stage of construction.

• In terms of valuation, we do not expect any material impact to FY23F-FY25F since the award could only come into effect in 2025, subject to how soon the testing procedures and requirements can be fulfilled. Hence, we make no changes to our forecasts.

• Nevertheless, considering that the first sales contribution of RM67mil to kick in in FY25F, this could add 6% to M&E’s pretax income (assuming a margin of 6.7%). As M&E accounts for only 6%-7% of FY23F group revenue, this contract could generate a minimal earnings accretion of only 1% at group level.

• The company is currently trading at an attractive FY23F PE of 12x, lower than its 5-year average of 14x while offering a decent dividend yield of 3%.

Source: AmInvest Research - 11 Apr 2023