Post management meeting, we are anticipating a strong 4QFY22 performance with good dividend payout. Management expects performance to sustain into FY23, given the spill over effects of high backlogs for automotive segment, while equipment and manufacturing (include aerospace) segments continue to register recovery. The current strong balance sheet and net cash position have built up UMW’s war-chest to explore M&A opportunities as part of the group’s growth strategy. Maintain BUY on UMW with a higher TP: RM4.25 (from RM3.85) based on 10% discount to SOP: RM4.72.

4QFY22. Management guided for continued strong 4QFY22 showing, underpinned by the accelerated automotive production and deliveries during the quarter. Both Toyota (including Lexus) and Perodua registered record quarter sales volume of 30.1k units (+20.8% QoQ; +14.8% YoY) and 85.7k units (+24.1% QoQ; +20.3% YoY) respectively in 4QFY22. Another round of good dividend can be expected for 4QFY22 results on the anticipated strong showing. The improved balance sheet and net cash position will also allow UMW to explore M&A opportunities.

Automotive. Given the current high outstanding order backlogs of 60k units for Toyota and 220k units for Perodua, management has guided strong spill over into FY23. Nevertheless, we expect the segment’s sales volume to slow down in 2023, after registering record highs of 101.0k units for Toyota (include Lexus) and 282.0k units for Perodua in 2022. There will be 5 new model launches for Toyota and 1 new model for Perodua (and 2 facelifts) in 2023. We also anticipate lower margins on inflationary cost pressures as well as advertising and promotional campaigns for the year. Recently Toyota has also adjusted pricing upwards for some existing models in order to pass through part of the higher costs to consumers. UMW remains reserved on EV demand given the high cost structure and lack of infrastructure.

Equipment. Further growth in 2023 will be driven by UMW’s strategizing into industry electrification (Go-Green), refurbishments and automation (system integration). Recently, there have been increasing demand for heavy equipment for mining sector in PNG and plantation sector in Malaysia, while on-going inquiries for infrastructure projects in Malaysia, Singapore and PNG.

Manufacturing. Automotive parts and lubricants are leveraging onto the ongoing strong demand for automotive segment and recovery of economic activities in 2023. UMW is in good position with upcoming commencement of new smart lubricant plant (additional 70% capacity) to expand its product lines, lower average costs and capture new markets.

Aerospace. The production and deliveries of Rolls-Royce fan cases (Trent 1000 and 7000) have continued to gain momentum as airlines ramp up aircraft fleets to meet the resumption of global air travel demand. Management guided for turnaround in 2023, after making profits in Nov-Dec 2022. UMW has also signed a new manufacturing contract with Rolls-Royce to localize “rear case” by 2025. Management will continue to explore new opportunities in high value precision technology manufacturing to expand their capabilities and utilizations.

Forecast. Raised forecasts for FY22 by 7.4%, FY23 by 16.5% and FY24 by 3.7%, accounting for higher sales volume.

Maintain BUY, TP: RM4.25. Maintain BUY with a higher TP: RM4.25 (from RM3.85), based on discount of 10% to SOP of RM4.72. UMW will continue to leverage onto the high automotive order backlogs and the continued economic recovery in 2023.

Source: Hong Leong Investment Bank Research - 3 Feb 2023