Result

• UMW Holdings Berhad (UMW) registered a core net profit of RM87.9m during 1Q21 as compared to core net profit of RM185.6m in the last quarter and core net profit of RM31m in the same quarter of a year ago. Meanwhile, revenue declined 8.9% qoq but increased 39.4% yoy.

• Performance above expectations. 1QFY21 core net profit of RM87.9m was deemed above our in-house/market expectation which accounted for 33%/28% of full year FY21 earnings estimates. The encouraging result was due to better earnings in both Automotive and Equipment segments despite discouraging performance on M&E segment.

Comment

• Extension of sales tax exemption and new model launch boosted Auto segment growth YoY. Auto division’s revenue and PBT jumped 51.1% yoy and 171% respectively. The stellar results were underpinned by the extension of sales tax exemption until 30 June 2021, introduction of new model (Toyota – Innova, Fortuner, Corolla Cross and Perodua Ativa) as well as the low interest rate environment.

• Outlook on the Auto segment will remain strong on the back of anticipated sales tax exemption which will be further extended…... We anticipate the sales tax exemption will be further extended by the government to December 2021 taking into consideration of the global chip shortage affected automotive market. Furthermore, Malaysia Automotive Association has forecasted the TIV will be growing 8% in 2021 and 6% in 2022.

• ……as well as expecting impressive performance of Perodua. The performance of Perodua is expected to remain strong due to the continuous demand for entry level vehicles underpinned by various initiatives of government’s stimulus package targeted for B40 groups and further supported by the newly launch of Ativa.

• Production is less severely impacted by the global auto chip shortage…… We have been briefed by the management that majority models of Toyota and Perodua productions are not severely impacted by the global auto chip shortage up to this point except for few of the models such as Toyota Camry will only be affected during 4Q21 and hence the Group is setting a sales target of 62,000 units for Toyota and 240,000 units for Perodua.

• ……and MCO 3.0. Moreover, the current utilisation rate of Bukit Raja Plant (BRP) is 73%-75% and experiencing full utilisation rate in its Shah Alam plant. The practice of rotating shifts in BRP and implementation in Shah Alam Plant have complied the 40% workforce under stricter MCO 3.0.
   
• Improved performance of Equipment segment underpinned by relaxation of MCO in the local market and recovery of economic activities in the foreign market amid bottom line dragged by Myanmar division. Equipment segment’s revenue was up 4.6%qoq and 15%yoy amid relaxation of MCO and recovery of economy on global market boosted the sales of Heavy equipment and Industrial equipment. However, the PBT on Equipment segment declined 14.9%yoy mainly impacted by the Myanmar operation due to political instability. We expect the Equipment segment will remain strong in tandem with the recovery of global economic activity in construction, mining, logistic and agriculture sectors.
   
• Deterioration of profit on M&E segment due to setback of Aerospace sub-segment. M&E segment’s revenue and PBT in 1QFY21 recorded RM 230.3m (-5.7% qoq/-7.4% yoy) in revenue and RM 8.4m in PBT (-63.2% qoq/-20.1% yoy) as a result of lower delivery of fan cases due to the impact of the pandemic on the aviation sector. However, the impact was mitigated by the strong performance of the Auto Components and Lubricants segments. We expect gradual recovery on the Aerospace sub-segment in view of the roll out of global vaccination programme which leads to the reopening of aviation sector.

Earnings Outlook/Revision

• We increase our core earnings forecasts for FY21F by 11.3% to RM292m and FY22F by slight +2% to RM 356.2m due to we are raising our forecast on sales of both Automotive and Equipment segment.

Valuation & Recommendation

• Maintain BUY call on UMW with a higher target price of RM3.90 (RM3.30previously) following our earnings upgrade and roll over our valuation to FY22F. Our valuation is pegged at PE multiple of 13x FY22F PE with an EPS of 30 sen which is in line with its 3- year mean PER. Our fair value of the stock renders 24% upside to the current share price.

• We favour its outlook as: 1) Auto division is spurred by sales tax exemption as well as introduction of new models; 2) Improved performance of Equipment division underpinned by global recovery of economic activity; and 3) Anticipating gradual recovery on M&E segment in view of roll out of global vaccination programme and the implementation of travel bubble.

Source: JF Apex Securities Research - 25 May 2021