Given the softer market conditions and intensifying competition among carmakers, we believe demand for Toyota cars may moderate further moving through 2H19. As such, we lower our 2019-21E EPS by 1-3% and lower our valuation for UMW Holdings (UMWH) to factor in the higher risk for the automotive and equipment segments, which leads to a lower TP of RM4.90. At 15x 2020E PER (close to the post O&G de-merger average PER of 17x), UMWH’s valuation looks fair.

Auto: Expect Perodua to Pip the Post and Toyota to Miss the Target

Although Toyota turned aggressive with new model launches, we think Toyota’s 8M19 lacklustre sales volume of 42.3k units (-15% yoy) may lead to it missing Toyota’s 2019 sales mark of 75k units. On a brighter note, we think the sustained popular demand for UMWH’s 38%-owned Perodua vehicles – 8M19 sales volume up 2% to 161.8k units – should easily meet the second national car’s revised sales target of 235k units.

Industrials to Keep the Equipment Segment Up and Running

Meanwhile, we expect equipment earnings to remain flat in 2019-21, supported by the resilient leasing business from the industrial equipment sub-segment (68% of 1HFY19 equipment PBT). However, we think that subdued demand for the heavy equipment sub-segment may nullify some of this positive effect.

M&E to Contribute Positively to Bottom Line by 2020, We Believe

Prospects for the Manufacturing & Engineering (M&E) segment look promising - 1H19 PBT turned black to RM15.6m (1H18 LBT: RM3.4m), as the aerospace sub-segment has achieved EBITDA positive since 2Q19 on a higher production volume of fan cases. Moving ahead, we expect UMWA to contribute positively in 2020 as it ramps up production capacity to 70%/ 90% utilisation rates (or 175 fans/225 cases) in 2020/2021.

Maintain HOLD With a Lower TP of RM4.90

We cut our 2019-21E EPS by 1-3% and reduce our Toyota sales forecasts and auto PBT margin assumptions, but raise our M&E contribution. In tandem, we lower our TP to RM4.90 (from RM5.20). UMWH’s share price fell drastically by 15% qoq, in our view due to declining foreign stock ownership, concerns of weaker prospects for Toyota sales and subdued demand for the heavy equipment segment. A re-rating catalyst is a higherthan-expected contribution from the M&E segment.

Source: Affin Hwang Research - 16 Oct 2019