Results

• UMW Holdings Berhad (UMW) posted a stellar 3Q22 with revenue of RM4.06b, +101.2% yoy and +8.8%  qoq, attributable to growth in all core business  segments mainly driven by the continued strong  momentum of vehicles sales thanks to robust backlog  orders.

• Weakness QoQ earnings dragged by associate  company (Perodua). UMW posted RM94m core earnings in  its 3Q22 (-12.1% qoq). The performance was mainly due to  sluggish performance of profit from its associate company  Perodua attributable to higher effective tax rate in 3Q22 as the  investment tax allowance (ITA) has expired on 30 June 2022.

• Earnings in line with expectation. 9M22’s RM309m core  earnings are in line with ours but exceeded street’s full year  forecast which accounts for 75%/81% FY22F inhouse/consensus forecast. 

• The Group’s automotive segment reported RM3.43b  revenue in 3Q22, surging +115.5% yoy and +10% qoq driven  by strong vehicles sales. However, the PBT of the segment declined qoq (-9.5%) with lower PBT margin (-1.2 ppts qoq)  due to lower share of profit from its associate company Perodua. 

• Further improvement in Equipment segment… UMW’s 3Q22  Equipment segment posted higher qoq revenue (+7.6%) and PBT (+41% qoq) due to higher demand for heavy and  industrial equipment in line with the recovery in construction  and industrial activities.

• … as well in Manufacturing & Engineering segment. The  segment posted 3Q22 revenue of RM252.2m (+128.7% yoy  and +11.4% qoq) and RM13.4m PBT (+64.2% yoy and  +2.8% qoq). The performance of the segment in the quarter was contributed by higher sales of auto components,  lubricants, and Aerospace’s parts in line with the robust  vehicles sales and recovering of air travel. 

• Interim dividend declared. The Group has declared a 3  sen/share of dividend in respect of the FYE22 (EX-date on 12  Dec 2022). This is the first interim dividend declared by the  board since FY18. We expect to see a growth of dividend  moving forwards compared to last 3 FYs supported by robust  balance sheet with RM1.37b in net cash position and solid  earnings forecast. Hence, we raise our dividend forecast for FY22F and FY23F to 9 sen and 7 sen (from 5 sen and 4 sen  respectively)

Comments

• FY22F and 1H23F vehicle sales expect to be boosted by  strong backlog orders. The management guided that the  backlog orders for UMW Toyota and Perodua have remained  strong up to date (UMWT: approximately 60k and Perodua: approximately 200K). On the back of that, we revise our FY22F  sales forecast for Toyota and Lexus units’ sales to 97.2k (from  82.6k) and Perodua sales forecast to 266k units (from 220k  units). Meanwhile, we raise our FY23F vehicles sales  forecast for UMWT to 77k (from 69k) due to at least 5 new  models will be launched in FY23. Nevertheless, we are  maintaining the 200.5k vehicles sales forecast for Perodua in  FY23F.

• Expecting strong performance in FY22F and 1H23,  followed by easing supply chain constraints and robust backlog  of vehicle orders. Meanwhile, the Equipment segment, which  includes Industrial and Heavy Equipment, is expected to be  boosted by greater economic activities in the regional market, while the M&E segment will be driven by a strong TIV forecast and the reopening of air travel in the industry.

• … but moderate in 2HFY23F. In view of minimal impact  from supply chain disruption on the production of UMW, we  envisage majority of the backlog order to be delivered in FY22  and early of FY23. Amid the global economy slowdown and  interest rate upcycle, we expect UMW’s performance in  2HFY23F to soften. 

• Downside risks. The downside risks include: 1) Geopolitical  risk – escalation in Russia-Ukraine War, China’s lockdown led to negative impact to the supply chain of production 2) Rising  interest rate and global recession affect demand for vehicles.  3) Large scale of order cancellation could kick in on the back  of recession and prolonged waiting period.

Earnings Outlook

• We raise our FY22F revenue forecast while maintaining  our net earnings forecast of RM 411.2m, owing to higher  vehicles sales estimation but lower profit margin after increased our tax rate forecast followed by the ITA expiry.

• Meanwhile, we upgraded our FY23F earnings forecasts to  RM 355.6m (from RM 330.6) due to increase of vehicles sales  estimation followed by backlog order is stronger than our  expectation.

Valuation/Recommendation 

• Maintain BUY call on UMW with a higher target price  on RM3.96 (previously RM3.68) as we upgraded our  FY23F earning forecast. Our valuation is pegged at PE  multiple of 13x FY23F PER with an EPS of 30 sen which is in  line with its 3-year mean PER. Our fair value of the stock  renders 19% upside to the current share price of RM 3.33.

Source: JF Apex Securities Research - 30 Nov 2022