Result

UMW Holdings Berhad (UMW) posted a 3Q21 revenue of RM2016.4m, -24.3% yoy and -17.5% qoq due to the lower contribution from Automotive and Manufacturing & Engineering (M&E) segment no thanks to imposition of FMCO in 3QFY21 in which only certain operations of the Group were allowed to be operated with limited capacity.

Misses expectations. UMW recorded a core net loss of RM47.7m in their 3Q21 (vs 3Q20: profit of RM 86.6m) and (vs 2Q21: net loss of RM 14.2m) which took its 9M21 core earnings to RM25.6m which only constitute 11%/12% of consensus/our in-house FY21 forecasts. The weak earnings performance on yoy and qoq were mainly due to the lower share from associated company (Perodua) (Share of results of associates in 3Q21: -RM5.7m, 3Q20: RM 94.3m, 2Q21: RM 25.2m) caused by the halted operation during FMCO.

Revenue of Equipment segment improved but profit affected by Myanmar operation. Revenue in Equipment segment inched up 6.4% yoy and 5.3% qoq thanks to the demand increased for local market (industry allowed to operate during FMCO) and overseas market. However, profit from the Equipment segment dropped 23.6% qoq and 28.5% yoy, affected by Myanmar operation with depreciation of Myanmar Kyat caused by the ongoing political unrest in Myanmar.

Lower sales of lubricants, auto-parts and aerospace components caused sluggish performance for M&E segment. Revenue from M&E plunged 31.1% qoq and 54.5% yoy which was adversely impacted by lower revenue contribution with the prolonged FMCO during the quarter.

Comment

UMW Toyota registered 54.6k units of sales during 10M21 whilst its associate company, Perodua registered 147k units for 10M21. Following the relaxation of economic activities, our forecast on Toyota sales is able to reach 70k units (target of management: 62k) in full year of FY21 on the back of encouraging orders and the extension of sales tax exemption. Meanwhile, our forecast on Perodua sales in FY21 is around 190k units (management target: 214k) due to the production of bestselling model – Myvi has been adversely affected by the shortage of semiconductor chips.

Expecting Equipment and M&E segments to improve gradually along with the economic recovery. Although the performance of Equipment segment will continue to be dragged by Myanmar operation, the negative impact should be mitigated by the positive outlook of construction and mining industries, along with the higher gold prices. In the meantime, the sales of auto-parts, aerospace and lubricants are expected to rebound as the disruption of supply chain has progressively eased as well as the increase of demand with the recovery of automotive and aerospace industries.

Pioneer of local electrifying automotive. UMW started their order-taking for its first locally assembled hybrid Electric vehicle (EV) Toyota Corolla Cross on 29 October 21 and is looking to introduce a fully EV Toyota model to local market in CY2022 and more models in CY2024. This allows UMW to take the lead in the field of local EV market with the positive outlook underpinned by the initiative of government to push EV.

Earnings Outlook/Revision

We revise up our revenue forecast for FY21F to RM10,797m (from RM 10,162m) due to the higher-than-expected demand of vehicles but lower down our forecast on core earnings for FY21F to RM168.2m (from RM 216.1m) after slashing the share of associate profits and margin in the Equipment segment as well as the M&E segment. Nevertheless, we keep our forecast for FY22F at RM356m, banking on the full recovery of economic activities in FY22F.

Our earnings forecasts are based on assumption of no breakout of the pandemic and no full lockdown in local and oversea markets.

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 27% upside to the current share price of RM 3.08.

Cautiously optimistic on the prospects of the Group’s performance under presence of some downside risks. Positive on UMW outlook as: 1) Encouraging backlog order underpinned by strong demand of vehicles; 2) Expecting Equipment and M&E segments to improve gradually along with the economic recovery; 3) Pioneer in local EV. Nevertheless, the downside risks which could bring the uncertainty to the Group are: 1) Ineffective vaccine against the virus variant; 2) Outbreak of pandemic cause re-imposition of lockdown of global economic; and 3) Longer-than-expected situation of global chips shortage.

Source: JF Apex Securities Research - 30 Nov 2021