Affin Hwang Capital Research Highlights
UMW Holdings - Cautious Optimism
We recently hosted UMW Holdings (UMWH) for a presentation to 11 Malaysian institutional investors. UMW is cautiously optimistic on its business prospects in 2020, despite the economic uncertainty and stiff competition in the automotive and equipment segments. Encouragingly, management is confident that the M&E segment will contribute positively by 2020. All in, we reaffirm our HOLD call with an unchanged SOTP-based 12-month price target of RM4.75. At a 15.7x 2020E PER (close to the post O&G de-merger average PER of 17x), UMWH’s valuation looks fair.
UMW Toyota expanding its SUV line-up
To recap, the Automotive 9M19 PBT dipped marginally to RM415m (-1% yoy) due to a lower Toyota sales volume in 9M19 (-10% yoy to 48k units) that was cushioned by higher Perodua sales (+6% yoy to 178.8k units). UMW Toyota (UMWT) plans to field 4 brand new SUV models in 2020. Management was tight-lipped about the model line-up / segment; we suspect the all-new Toyota RAV4 could be the first to be launched in 2020. UMWT has not firmed up the sales target for 2020 but aims to capture at least a 12% market share (11M19 market share: 11.3%).
Industrial equipment still steady but heavy equipment’s upside limited
The lacklustre demand / margins in the equipment business saw 9M19 PBT decline by 14% yoy to RM108m. Prospects for the industrial subsegment look healthy – UMWH intends to: (i) further expand into the leasing business model, (ii) tap into the manufacturing and e-commerce sectors in Vietnam, and (iii) increase its product offerings. We learnt that UMWH’s heavy equipment sub-segment may also: 1) venture into the leasing business model, 2) implement an extended warranty programme and maintenance service contract, 3) have a wider product line-up and 4) provide value-added services.
M&E segment likely to contribute positively in 2020
The M&E segment looks promising – 9M19 PBT more than doubled to RM31m (vs. 9M18 PBT: RM12m), driven by better performance from the aerospace and auto-parts components. UMW Aerospace (UMWA) has delivered >150 units of Trent 1000 fan cases to Rolls-Royce (since the start of production in 2017) and we gather that the production of Trent 7000 fan cases is still scheduled to commence in 4Q20. We continue to expect UMWA to contribute positively in 2020 as it ramps up to 70% / 90% utilisation rates (or 175 fans / 225 cases) in 2020/2021.
UMW Toyota expanding its SUV line-up
To recap, the Automotive 9M19 PBT dipped marginally to RM415m (-1% yoy) due to a lower Toyota sales volume in 9M19 (-10% yoy to 48k units) that was cushioned by higher Perodua sales (+6% yoy to 178.8k units). UMW Toyota (UMWT) plans to field 4 brand new SUV models in 2020. Management was tight-lipped about the model line-up / segment; we suspect the all-new Toyota RAV4 could be the first to be launched in 2020. UMWT has not firmed up the sales target for 2020 but aims to capture at least a 12% market share (11M19 market share: 11.3%).
Industrial equipment still steady but heavy equipment’s upside limited
The lacklustre demand / margins in the equipment business saw 9M19 PBT decline by 14% yoy to RM108m. Prospects for the industrial subsegment look healthy – UMWH intends to: (i) further expand into the leasing business model, (ii) tap into the manufacturing and e-commerce sectors in Vietnam, and (iii) increase its product offerings. We learnt that UMWH’s heavy equipment sub-segment may also: 1) venture into the leasing business model, 2) implement an extended warranty programme and maintenance service contract, 3) have a wider product line-up and 4) provide value-added services.
M&E segment likely to contribute positively in 2020
The M&E segment looks promising – 9M19 PBT more than doubled to RM31m (vs. 9M18 PBT: RM12m), driven by better performance from the aerospace and auto-parts components. UMW Aerospace (UMWA) has delivered >150 units of Trent 1000 fan cases to Rolls-Royce (since the start of production in 2017) and we gather that the production of Trent 7000 fan cases is still scheduled to commence in 4Q20. We continue to expect UMWA to contribute positively in 2020 as it ramps up to 70% / 90% utilisation rates (or 175 fans / 225 cases) in 2020/2021.
Monetising long-held land assets
Management shared that close to 40 acres of UMWH’s Serendah land (out of 861 acres) have been taken up so far (Fig 1). UMWH is in active negotiations with potential buyers to relocate their business operations to Serendah. We gather that some of UMWH’s operations in Shah Alam (ie. equipment segment, UMW Advantech and Lube Group) will be relocated to Serendah within the next few years.
Maintain HOLD with unchanged TP of RM4.75
We maintain our earnings forecasts, HOLD rating and 12-month price target of RM4.75, based on our SOTP valuation (Fig 2). At a 15.7x 2020E PER (close to the post O&G de-merger average PER of 17x), UMWH’s valuation looks fair. Key upside risks: higher-than-expected contribution from the aerospace segment, a strong rebound in Toyota sales, and a pick-up in construction and mining activities which would spur equipment sales, and the strengthening of the RM. Key downside risk: intense competition in the automotive and equipment segments and higher-thanexpected losses of O&G assets.
Source: Affin Hwang Research - 24 Dec 2019
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