We are upgrading our call on UMW Holdings (UMWH) to a BUY (from HOLD) with higher TP of RM6.30 on valuation grounds as the stock is currently trading at an undemanding 10x FY19E EPS (35.1% discount relative to peers).

Auto Sales to Soften in 4Q18; Exciting Model Launches in FY19

We expect softer sales volume moving into 4Q18 due to the advanced purchases during the tax holiday period. Moving forward, UMW will parade numerous model launches, namely the Vios, Camry and possibly the Yaris as well as the new Perodua SUV between 4Q18-1H19.

Equipment to See Wider Product Range, Deeper Market Penetration

The alliance with Komatsu will enable UMW to gain better access to a wider range of Komatsu’s products and penetrate deeper into the construction and mining sectors within existing markets. Overall, we expect the equipment earnings to grow CAGR of 7.5% over FY17-20E, supported by the resilient leasing business from the industrial equipment sub-segment in the warehouse and logistics sector.

M&E Segment’s Breakeven Point May Take Time

Technical problems with the Rolls-Royce Trent 1000 aircraft engine may prolong the start-up losses incurred at the M&E business (1H18/FY17 LBT losses at RM3.4m/RM29.5m). This has led UMW to cut the fan cases target to 70 units from 80 units for FY18.

MBM Takeover Still in the Balance; Offer Price Remains Unattractive

We believe the MBM takeover offer price of RM2.56 remains unattractive (below our target price of RM3.27) – it values MBM at a 30% discount to its net asset per share; in addition, the RM4.2bn implied price tag values Perodua at 9.5x 2017 PER, appears low.

Upgrading to BUY on Compelling Valuations

UMWH’s share price fell drastically by 26% qoq on possible concerns over: 1) the UMW-MBM deal falling through and 2) weaker prospects of auto sales after the reimplementation of SST. Nonetheless, we raised our FY19-20E EPS by 13-29%, taking the view that the exciting model launches will lift car sales and modest growth from UMW’s other two core segments. Hence, we believe there is upside potential, as the stock is trading at 35.5% discount to the current sector forward PER of 15.4x. Upgrade to BUY with a higher target price of RM6.30. Downside risks include higher-than-expected losses of O&G assets and weaker-thanexpected vehicle sales.

Source: Affin Hwang Research - 22 Oct 2018