• We favor UMW Holdings (UMW) due to its diversified business model that includes automotive, equipment, manufacturing and engineering, as well as property development.

• The potential for earnings growth appears to be cautiously optimistic, driven by favourable automobile demand, strong consumer sentiment, and increasing demand for products and services across various sectors.

• We re-initiate coverage on UMW with a BUY call and Target Price of RM4.57, pegged at 13.9x PER to FY23F EPS of 32.9sen. The attractive total return, including a dividend yield of 4.1%, at our target price amounts to 24%.

Pragmatic Prospects

We favour UMW due to its diversified conglomerate business model, which spans across various sectors including automotive, equipment, manufacturing & engineering, and property development. The group operates through a network of subsidiaries and associates, serving a global clientele with renowned brands and extensive geographical coverage. The business outlook for UMW appears highly promising, driven by several key factors, namely 1) a robust backlog of orders for vehicles, indicating strong demand in the market, 2) the anticipated recovery of the Chinese economy that is expected to further bolster UMW's prospects, 3) the projected improvements in commodity prices, 4) an anticipated increase in demand for auto parts and lubricants, aligning with the higher sales of vehicles, and 5) the reopening of international borders which is likely to result in a rise in air travel.

Cautiously Optimistic on Outlook

The presence of unfavourable factors such as subdued consumer sentiment, an elevated interest rate environment, and volatility in foreign exchange, has the potential to pose risks to our earnings forecast. Consequently, these factors could result in a subdued growth outlook for UMW's various business segments.

Dividend Payout

We anticipate that UMW to pay a DPS of 15.5 sen for FY23 to FY25, reflecting a payout ratio of 40% of PATAMI. This projection is in line with the dividend payout ratio in FY22 which resulted in a dividend yield of 3.7% based on the current market price.

Re-initiate Coverage with a ‘BUY’ call and TP of RM4.57

We re-initiate coverage on UMW with a BUY call and TP of RM4.57, pegged at 5-year average PER of 13.9x to FY23F’s EPS of 32.9sen. Our assumption is based on the expectation that UMW's earnings will gradually recover to pre-pandemic levels, reaching approximately to RM384.7mn in FY23F. With a total return of 24%, inclusive of a dividend yield of 4.1%, UMW presents a compelling opportunity for investors, in our view, considering the increasing demand for the company's diverse range of manufacturing & engineering products and services, and equipment despite the expected normalization of vehicle demand post FY23.

Source: BIMB Securities Research - 6 Jul 2023