Result

• UMW Holdings Berhad (UMW) posted a better 2Q22 revenue of RM3.73b, +52.6% yoy and +2.2% qoq, mainly driven by the continued strong momentum of automotive thanks to strong backlog orders.

• Flattish QoQ performance. UMW posted RM107.2m core earnings in its 2Q22 (-0.7% qoq). The flattish performance was mainly due to production and delivery being affected by a plant shutdown of more than 10 days in April for preparation of new models. Besides, there was also a festivity-induced (Hari Raya) shutdown in May. We expect a stronger 2H performance on the back of robust order book.

• Earnings exceed expectation. 1H22’s RM215m core earnings has exceed our/consensus full year forecast which accounts for 64%/63% FY22F in-house/consensus forecast. The positive variance was mainly attributed to stronger than expected performance from automotive contribution as the impact of supply chain disruption to the Group is lighter than our expectation.

• The Group’s automotive segment reported RM3.12b revenue in its 2Q22, surging +57.3% yoy and +1.5% qoq. However, the PBT has declined slightly due to lower share of profit from associated company. Marginally higher qoq revenue from the automotive segment was boosted by higher sales of automotive parts.

• Better operation efficiency in Equipment segment. UMW’s 2Q22 Equipment segment posted lower qoq revenue (-1.4%) but a higher qoq PBT (+11.6%) qoq as results of various cost savings initiatives in the segment.

• Manufacturing & Engineering segment. The segment posted 2Q22 revenue of RM226.4m (+41.6% yoy but - 0.3% qoq) and RM13.1m PBT (+115.4% yoy and +13.1% qoq). Similarly, the segment has a better profit margin in the quarter (+1.1 ppts qoq) due to cost optimization.

Comment

• FY22F Vehicles unit sales boosted by strong backlog order. With the vehicle sales tax exemption extended to 31 March 2023 from June 2022, vehicles unit sale is expected have a robust backlog order. On the back of that, we revise our sales forecast for Toyota and Lexus units sales to 82.56k (from 75k) and Perodua sales forecast to 220k units (from 210k units). Meanwhile, management has upgraded their sales target for Toyota/Lexus to 80k units (from 73k units) but maintaining their sales target of Perodua on 247.8k units.

• Expecting stronger 2H22 performance. Our sales forecast has factored in the adverse impact of production but still expect a yoy growth on the back of robust order book, introduction of new model (HEV Toyota Corolla Cross in 14 Jan 2022, Camry new facelift in 17 Feb 2022, Perodua Alza on 20 July 2022 and Toyota Veloz which order started taking from 24 June 2022). Meanwhile, the Equipment segment which includes Industrial and Heavy Equipment are expected to be boosted by greater economic activities in the regional market while the M&E segment will be driven by strong TIV forecast in the industry.

• Strengthening of USD/MYR and higher input price possibility lead to another round of vehicles price hike. Management is not ruling out the possibility of further price increase on the vehicle units on the back of higher import price due to weakening MYR/USD and higher components parts price to partially transfer the impact to consumers. We envisage a 3%-5% hike on the next price adjustment.

• Expecting moderate FY23F. In view of minimal impact from supply chain disruption to the production of UMW, we envisage majority of the backlog order to be delivered in FY22 and early of FY23. Amid global economy slowdown and interest rate upcycle, we expect UMW’s performance in FY23F to soften.

• Downside risks. The downside risks include: 1) Geopolitical risk – Russia-Ukraine War, Sino-US tension lead to negative impact to the supply chain of production 2) Rising interest rate affect demand of vehicles. 3) Large scale of order cancellation could kick in on the back of recession. Earnings

Outlook/Revision

• We raise our FY22F earnings forecast to RM 411.2m (from RM 336m previously) in view of better than expectation 1H results and smaller impact from supply chain disruption. Meanwhile, we revise down our FY23F earnings forecasts to RM 330.6m (from RM 383.9m) due to expecting more backlog order will be deliver on FY22 instead of FY23.

Valuation & Recommendation

• Maintain BUY call on UMW with a lower target price on RM3.68 (previously RM4.27) as we downgraded our FY23F earning forecast. Our valuation is now pegged at PE multiple of 13x FY23F PER with an EPS of 28 sen which is in line with its 3-year mean PER. Our fair value of the stock renders 20% upside to the current share price of RM 3.06.

Source: JF Apex Securities Research - 29 Aug 2022