Investment Highlights

• We maintain HOLD on UMW Holdings with an SOP-based FV of RM5.85/share. We visited the UMW Aerospace plant last week, and the key points here expound on our previous report (“Space for more” dated 10 Jan, 2018).

• To recap, UMW Aerospace will make fan cases for the Rolls-Royce Trent 1000 and Trent 7000 engines, which are used in the Boeing 787 Dreamliner and Airbus A330neo respectively.

• Key points:

1) We hold back from ascribing a value to the aerospace operation until we have better earnings visibility. It is envisioned to break even by 2019 when it produces 160 fan cases a year (from 80 in 2018). We believe that the amount of time to achieve profitability is acceptable given the contract’s extensive period of 25+5 years. Overall, we are encouraged by the long-term prospects and the stable path towards ramping up the operation.

2) UMW Aerospace will raise the group’s profile in the space of high-value manufacturing (HVM). UMW Aerospace is a sophisticated operation with nearly all of its raw materials imported (from 9 countries and across 3 continents) and a sizable workforce of highly-skilled staff (138 workers now).

We believe aerospace will serve as a crucial stepping stone in two ways: UMW’s expansion into other HVM areas (such as transport & energy) although we caution that such a move would take place much later given the substantial capex and gestation period evidenced by the aerospace venture), and the monetization of the remaining 830 acres that UMW owns within Serendah (also marketed to other HVM firms, which could see it either setting up its own operations or forming a JV with the related companies). Primary targets for the HVM park will be global companies which are looking to ground their supply chains to Asia, in the way that Rolls-Royce is aspiring to.

3) Aerospace will eventually anchor the M&E segment. Contribution from the M&E segment has been unremarkable and stood on the lubricant and auto components businesses, which UMW has done for decades. We believe this would be retained given their link to the group’s auto manufacturers (Perodua, Toyota).

• We are reassured that the group’s growth plans appear to be holistic, i.e. auto will see a second local Toyota plant come onboard next year, M&E to play a bigger role as aerospace earnings kick in and equipment which has seen a restructuring of its Komatsu distribution towards improving penetration in some key markets.

• Overall, we believe UMW has set up a promising road map as a more ambitious entity following the demerger of the listed O&G unit in early 2017. We remain prudent on immediate concerns namely the strategy for Toyota sales and its plans to raise its ownership in Perodua via the acquisition of MBM.

Source: AmInvest Research - 24 Apr 2018