What’s new

• Site visit of the new plant. We attended a site visit at Toyota Plant 2 in Bukit Raja, Klang which was organized by UMW Holdings Berhad (UMWH). We came back feeling upbeat about the Group’s rationalization plans towards its Automotive Segment. The visit started with a short briefing on the plant’s safety and some history of Toyota plant before moving into the factory tour.

• Snapshot. Bukit Raja Plant (BRP) is owned by Assembly Service Sdn Bhd (ASSB), a subsidiary of UMW Toyota Motor Sdn Bhd. It is takes almost a year for construction of the plant and it starts commencing operation in Jan’19. BRP’s size is 2.6x bigger than Shah Alam Plant (SAP) with 50k units’ production capacity (vs SAP: 38k units).

Comment

• High level of automation. The plant consists of few shops namely Welding shop, Paint shops, Assembly shop and Quality Control shops. These shops are specifically referred to process of welding, painting, assembly and inspections. The plant is currently running on two shifts with high automation, around 43% as compared to 23% in SAP. Welding and Paint shops are running with high level of automation processes compared with others since every shop has different degree of automation. Looking forward, ASSB expects Welding and Paint shops’ automations will increase in the future as to cater the rising demand. Overall, the processes for manufacturing each car require twelve hours starting from welding until inspection, which equal to one and half shift. Overall, they are able to produce 190 units of cars per day. Besides, the BRP is set up environmental friendly with the building is covered up to 76% solar-energy power.

• Improve in localization. The plant’s setup is able to accommodate up to C segment car platform. At the moment, the Group is focusing on two models which are the new Toyota Vios and Toyota Yaris with 50k units of production capacity. Local content for the new Vios has improved to 80% (from 58% previously), resulting in better margin for the Group. Besides, Toyota Yaris is also expected to have similar localization rate and to be assembled in the plant starting Apr’19. We understand that the plant is currently operating above break-even level following the massive demand of the new Toyota Vios.

Earnings Outlook/Revision

• No changes to our 2019F and 2020F earnings forecasts as we already factored in earnings contributions from the BRP operation.

• Looking forward, we expect the Group to focus on its three core businesses which will resume its growth momentum over the medium to longer term. We favour the stock as its: 1) Auto division is expected to register robust growth following new models come in and completion of new plant in Bukit Raja in 2019 (initial 50K capacity p.a.) which will further boost its Toyota sales volume; 2) M&E division is expected to breakeven in 2020F and move towards into high value added manufacturing banking on aerospace venture; 3) Joint venture with Komatsu that will bolster its existing market share; 4) Exit of unlisted O&G segment will help to improve the Group’s overall profitability.

Valuation & Recommendation

• Maintain BUY call on UMW with an unchanged target price of RM7.00. Our fair value is based on 13x FY2019F PE which is below its 5-year historical average PE of 18.6x.

Source: JF Apex Securities Research - 12 Mar 2019