• 1H22 results beat expectations, making up 75%/64% of our/consensus FY22F forecasts on better-than-expected sales from UMWT and Perodua.
• We raise our FY22-24F EPS by 2-22% to account for higher sales volume but still project a softer 2H22F in view of SST expiry and unfavourable forex.
• Reiterate Add with a higher RM4.40 TP, still based on 14x CY23F P/E. UMW trades at an undemanding 10x CY22F P/E and 0.8x CY22F P/BV.

Marginally lower qoq core net profit in 2Q22

Pretax profit in 2Q22 grew 6.4% qoq to RM230m due to higher contribution from the equipment and manufacturing & engineering (M&E) divisions following various cost-saving initiatives. Meanwhile, the automotive division posted a 1.4% qoq drop in pretax profit, mainly due to lower share of profit from its associate. Meanwhile, the group incurred a higher tax expense in the quarter as it made a higher tax provision related to prosperity tax for a subsidiary with aggregate income that exceeded RM100m. Overall, UMW’s core net profit fell marginally by 0.9% qoq to RM107m in 2Q22 (vs. RM108m in 1Q22).

1H22 core net profit jumped 2.7x yoy

Revenue in 1H22 surged 37% yoy to RM7.4bn, driven by higher contributions from all divisions – automotive (+41%), equipment (+17%) and M&E (+16%). The group attributed the stronger automotive revenue to higher sales volume from UMW-Toyota (UMWT), which grew by 35% yoy to 45.9k units. Stripping out exceptional items such as RM6.8m liquidation loss on a subsidiary asset, UMW posted a 2.7x jump in 1H22 core net profit to RM215m compared to RM73m core net profit in 1H21.

Raising FY22-24F EPS by 2-22% but still expecting a softer 2H22F

We raise our FY22-24F EPS by 2-22% as we lift our sales volume forecasts to 88k units (vs. 80k previously) for UMWT and 248k units (vs. 230k previously) for Perodua in FY22F on the back of healthy order backlog, which stood at 60k and 240k, respectively, as of Jul 22. The group expects to deliver these backlog orders by 1QCY23F. Despite this, our FY22F forecast still implies softer vehicle delivery in 2H22F (-5% hoh) in view of the expiry of the sales and service tax (SST) exemption period on 30 Jun 22. Meanwhile, we gathered from management that UMWT is seeing encouraging recovery in booking registrations, especially in Aug, amidst concerns over a demand slowdown for cars post SST expiry. Meanwhile, we impute a higher average forex assumption of RM4.20-4.30 to US$1 for FY22-24F to reflect the depreciation in ringgit against US$.

Reiterate Add with a higher RM4.40 TP

Following our earnings upgrade, we raise our TP from RM4.00 to RM4.40, still based on 14x CY23F P/E, in line with our target sector P/E. UMW trades at an undemanding valuation of 10.2x CY22F P/E, 1 s.d. below its 3-year mean of 14x, and 0.8x CY22F P/BV, below its net asset value of RM3.57/share as at end-Jun 2022. The stock also offers decent 2.6-3.3% FY22-24F dividend yields.

Source: CGS-CIMB Research - 29 Aug 2022