Result

• UMW Holdings Berhad (UMW) posted a 2Q21 core net loss of RM39.6m after including the RM35m distribution to sukuk holders and excluding other non-operating profits.
• On qoq comparison, bottom line slumped from a core net profit of RM87.9m in 1Q21 due to decrease of sales in all segments, following the implementation of the FMCO started 1 June 2021 which halted the Group’s business activities and the sales gallery operations.
• On yoy basis, we witnessed the narrowing core net loss for this quarter against 2Q20: -RM79.8M mainly due to the low base in last year with the imposition of MCO 1.0.
• Result is away lower than expectations. 1H21 reported net profit of RM76.2m misses our in-house and the market expectation which only accounts for 26% of our and market full year earnings estimates. The disappointing result is mainly due to the impact of FMCO resulted in merely 1,921 units of auto sales in June 2021.
• Improvement of Equipment segment performance. The Equipment segmental PBT recorded RM31.8m in 2Q21 which grew 45% qoq and 29.1% yoy. The better performance was mainly supported by the Industrial Equipment sub-segment as the Group undertook cost optimization exercise as well as lower forex losses for the period.
• Manufacturing & Engineering (M&E) segment was dragged down by aerospace sub-segment but cushioned by auto-components and lubricants sub-segment. M&E segment in 2Q21 recorded a loss before tax of RM6.1m, against 1Q21 PBT: RM8.4m and 2Q20: RM8m mainly affected by lower delivery of fan cases. Nonetheless, the 1H21 sales of auto components surged 36% yoy mainly supported by increased plant capacity. Meanwhile, lubricants sales increased by 31% yoy due to improved demand.

Comment

• Optimistic on sales target for FY2021. UMW targets to achieve 62k units of Toyota (including Lexus) and 240k units of Perodua. In 1H21, UMW has sold combined 131.4k units with a market share of 52.7% in domestic (34,111 units of Toyota, +84.7% yoy) and 97,290 units of Perodua, +31.2% yoy). We are optimistic that the Group will achieve the sales target underpinned by extended sales tax exemption and easing of FMCO restriction.
• Recovery in sight to drive auto sales…… FMCO which was started on 1 June dealt a serious blow to the automotive industry. However, the performance of UMW is expected to gradually recover as the automotive industry including the showroom are allowed to operate starting from 16 August 2021 following the easing of restriction. We believe the strong orders accumulated during lockdown, sales tax exemption and the introduction of new vehicle models could elevate the sales of automotive segment in the second half of 2021.
• ……as well as the easing restriction of economic activities benefiting M&E segment. The sales of Equipment and M&E segments are expected to be spurred by the recovery of economic activities such as construction sector and warehousing hence driving the demand of its products which are industrial and heavy equipment (forklift, excavator, etc.). 
• Keeping up with the times. The era of electrification of cars is ahead. UMW has announced its move to advance the local manufacturing of hybrid electric vehicle (HEV) by investing further RM270m locally last month. Furthermore, the Group is planning to build a new Smart Lubricant Plant equipped with cutting-edge technology amid the industry 4.0 revolution to improve the productivity and efficiency lead to the better cost optimization.
• Mitigation plans to weather the downside risk of the pandemic. The Group has well-planned to survive under current challenging economic environment with elevated Covid confirmed cases. UMW has shifted their marketing channel to online for promoting their products and has increased the digital sales to visitors during the lockdown. Furthermore, the aerospace segment has utilised the existing idle capabilities to diversify into nonaero customers such as supply to Rolls-Royce.

Earnings Outlook/Revision

• We revise down our core earnings forecasts for FY21F by 26% to RM 216.1m after lowering our sales assumption of all three segments after considering the halted operation of the Group during lockdown but keeping our forecast for FY22F at RM356.2m banking on the full recovery of economic activities in FY22.

Valuation & Recommendation

• Maintain BUY call on UMW with an unchanged target price of RM3.90. 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 22% upside to the current share price of RM 3.20.
• We favour the stock outlook as: 1) Auto division is spurred by sales tax exemption as well as introduction of new models; 2) The effort of keeping up with the times (invested in HEV, cutting-edge technology plant and enhance digitalisation effort to cater the current market demand); and 3) Anticipating gradual recovery in Equipment and M&E divisions in view of roll out of global vaccination programme and easing of restriction.

Source: JF Apex Securities Research - 27 Aug 2021