UMW’s offer to acquire stakes in MBMR (from Med-Bumikar) and Perodua (from PNB) has lapsed and UMW will not further extend the period for the offer and pursue the proposed rights issue. Nevertheless, the encouraging sales volume of Toyota and Perodua for 9M18 as well as the attractive model line-ups in 4Q18 and 1Q19, have prompted us to adjust forecasts for FY18 (+13.6%) and FY19 (+1.6%) while maintaining forecast for FY20. Upgrade to BUY (from Hold) with lower TP: RM5.35 (from RM6.28) based on 10% discount to SOP of RM5.93 (after excluding valuation for MBMR and Perodua), given the recent drastic drop in share price.

NEWSBREAK

UMW announced the lapse of offer to acquire stakes in MBMR (from Med-Bumikar) and Perodua (from PNB) and UMW will not to further extend the period for the offer. Following the lapse, UMW will not be pursuing the proposed rights issue.

HLIB’s VIEW

Negative. With the lapse of offer, UMW has failed to acquire additional earnings contribution (from MBMR and Perodua) to boost its bottomline. Hence, UMW will have to rely on organic growth of its existing automotive (Toyota and Perodua) and manufacturing (Rolls-Royce engine fan cowl) segments.

Toyota. Thanks to GST zerorisation Jun-Aug period, Toyota sales volume was encouraging at 52.9k units for 9M18 (vs. 70k sales target for 2018). The recently launched new Rush and upcoming new Camry in 4Q18 will provide support to the expected weakened sales in 4Q18, while new Vios in early 2019 will further lift overall sales volume next year. We expect the prices of the new launches to take into account of the weakening RM against USD. Furthermore, management is upbeat on the commencement of Toyota new assembling plant in Klang by end 2018, which will improve its production efficiency and improve cost structure. Nevertheless, we have concerns on the start-up costs (low utilization) of the new plant, which may offset the improvement in efficiency.

Perodua. Similarly 9M18 Perodua sales volume was reassuring at 168.2k units (vs. 209k sales target for 2018) and sales in 4Q18 is expected to remain strong with the resumption in production and delivery of Myvi in Oct. The highly anticipated new SUV model will be launched in Feb 2019, supporting Perodua overall sales volume in 2019.

Rolls-Royce fan cowl. The expected delivery of fan cowl is lower than initial projection of 80 units in 2018 due to issue with Rolls-Royce engine. The issue may continue to drag on into 2019 and result higher than expected losses for UMW Aerospace.

Forecast. Adjusted earnings for FY18 (+13.6%) and FY19 (+1.6%), while maintaining forecast for FY20, following upward adjustment to automotive sales volume assumptions.

Upgrade to BUY, TP: RM5.35. We adjusted lower our SOP-derived TP to RM5.35 (from RM6.28) based on 10% discount to SOP of RM5.93 following removal of MBMR and Perodua valuation (lapse of offer). However, we upgrade UMW to BUY (from Hold), following the recent drastic drop in share price. We expect UMW to sustain earnings from new launches for Toyota and Perodua.

Source: Hong Leong Investment Bank Research - 31 Oct 2018