We remain cautious on UMW Holdings (UMWH)’s near-term outlook, as we believe the Covid-19 pandemic will likely reduce demand for its auto and equipment segments. We believe these concerns and the decline in foreign shareholding have resulted in UMWH’s share price falling by 66% in the past year, retracing back to its 2007 share price levels. In view of the challenging business outlook, we lower our SOTP-based 12-month TP to RM2.00 (from RM2.30) based on lower valuation multiples. At a 10.8x 2020E PER, the valuation looks fair.

Expect Weaker Automotive Sales in 2020E

Toyota and UMWH’s 38%-owned Perodua are guiding for flat to lower sales in 2020, targeting to sell 66k units (-6% yoy) and 240k units (-0.1% yoy) respectively. We believe these targets are hard to reach in a weak consumption environment, and we estimate lower Toyota and Perodua sales of 57k units (-19% yoy) and 217k units (-10% yoy) respectively. UMW Toyota hopes to cushion the impact by introducing 4 new SUVs in 2020, namely the Lexus UX, Toyota RAV4, and two undisclosed SUV models.

Near-term Upside Remains Limited for the Equipment Segment

Management acknowledged that the outlook for heavy equipment remains subdued for the key markets in which it operates – largely due to the reduced infrastructure spending in Malaysia and mining suspension in Myanmar. We believe this shortfall may be cushioned by the steady leasing business in the warehouse and logistics sectors.

M&E Segment Remains the Bright Spot

We expect UMW Aerospace (UMWA) to contribute positively in 2020 as it ramps up to 70%/90% utilisation rates (or 175/225 fan cases) in 2020/2021. Management guided that the Covid-19 outbreak is unlikely to result in any cancellation of orders due to the high backlog of orders currently.

Reaffirm HOLD With a Lower TP of RM2.00

We are keeping our forecasts unchanged, but lowering our TP to RM2.00 (from RM2.30) based on lower valuation multiples (Fig 10), in view of the challenging business outlook. At a 10.8x 2020E PER (close to the post O&G demerger -2SD PER of 9x), UMWH’s valuation looks fair, considering the tough business outlook.

Source: Affin Hwang Research - 17 Mar 2020