Investment Highlights

• We reiterate BUY call on UMW Holdings with an unchanged sum-of-parts (SOP)-derived fair value (FV) of RM4.75/share. Our FV implies a FY23F PE of 13x, at parity to its 5-year mean. We retain our neutral 3-star ESG rating.

• We made no changes to our forecasts as we expect the contribution from the aerospace sub-segment to the group’s earnings to be still minimal in FY23. This is in view that the subsegment’s earnings have only started to turnaround into the black from losses in FY22.

• We visited UMW’s aerospace plant in Serendah yesterday. The visit affirmed our positive view on the group. Here are the key takeaways: -

• In April 2023, UMWH received a 15-year contract worth RM1bil from Rolls-Royce Plc (RR) to manufacture rear cases for Trent 1000 (Boeing 787) and Trent 7000 (Airbus A330) aircraft engines. The job will commence in FY25F.

• The manufacturing & engineering (M&E) division is expected to enjoy additional sales of RM67mil per year, from the contract. Assuming a pre-tax profit (PBT) margin of 7%, the contract is estimated to improve M&E’s PBT by 6%. As M&E accounts for less than 10% of the group’s PBT, the impact of the contract is expected to be minimal.

• We understand that UMW would be able to pass on currency risks and any increase in input costs i.e., raw materials (mainly titanium) and component costs to RR. This will help support operating profit margins of the sub-division.

• As the sub-division is able to maintain their profit margin by passing on any cost increases to RR, we expect improvements to revenue coming from a higher plant utilisation rate. The establishment of new capabilities such as chemical milling, complex machining, and additive manufacturing in FY25F, is expected to help improve the sub-division’s plant utilisation rate.

• We also gather that 250 units/year of fan cases could be delivered in full capacity and so far, cumulatively more than 100 units have been shipped. In FY22, the aerospace sub-segment’s sales accounted for 23% or RM226mil of the total M&E division’s revenue of RM984mil. However, the contribution was minimal to the group’s revenue at only 1% in FY22.

• The aerospace sub-segment turned around in 4QFY22 and 1QFY23. We expect the sub-division’s earnings to continue improving in FY24F as air travel is expected to recover to prepandemic levels by the end of this year. Increased new orders for planes and the clearing of backlog orders are expected to sustain the growth of the aerospace sector.

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  Data from the International Air Transport Association (IATA) showed that total traffic in March 2023 (measured in revenue passenger kilometers or RPKs) rose 52% YoY. Globally, traffic is now 88.0% of March 2019’s levels.

• UMW is currently trading at an attractive FY23E PE of 10x, which is lower than its 5-year average of 13x while offering a dividend yield of 3%.

Source: AmInvest Research - 15 Jun 2023