Results

• UMW Holdings Berhad (UMW) posted a better quarter in 1Q23 with revenue of RM4.38b, +20% yoy and +0.1% qoq, attributable to growth in all core business segments mainly driven by continued momentum in demand post-pandemic.

• Stellar earnings. UMW delivered impressive 1Q23 core earnings of RM134.5m, marking a significant yoy growth of 24.5% and a qoq increase of 20.1%. The stellar performance can be attributed to the improved contribution from its associate company, Perodua, and reduced finance costs following the settlement of a RM400 million term loan in the previous quarter.

• Earnings in line of expectation. 1Q23 results are in line with our forecasts after accounting for 38%/34% of our/consensus full year core earnings estimation as we expecting the earnings will show weakness in 2H23.
   
• Automotive division lifted by strong vehicle sales. In 1Q23, the Automotive segment achieved RM3.63 billion in revenue, representing a yoy growth of +18.1% but a slight qoq decline of -1.8%. The strong vehicle sales during this period were primarily influenced by the delivery of SSTexempted vehicles by 31 March. The segment's PBT showed a yoy increase of 5.4% and a qoq rise of 18.8%, primarily driven by a higher share of profit from associated company Perodua.
   
• Increased demand for heavy equipment. UMW’s Equipment division experienced strong performance in 1Q23, with higher revenue on both qoq (+10%) and yoy (+17%) basis. The segment's PBT also exhibited significant growth, increasing 44% qoq and 61.6% yoy. This positive outcome can be attributed to the heightened demand for heavy and industrial equipment, aligned with the recovery of construction and industrial activities in both local and overseas markets. Additionally, the segment's profit margin demonstrated improvement, rising by 3.3ppts yoy and 2.8ppts qoq, mainly driven by lower operating expenses.
   
• Manufacturing & Engineering division also posted growth. The segment recorded strong results in 1Q23, with revenue reaching RM323.6m, representing a yoy growth of 42.5% and a qoq increase of 16.2%. The segment's PBT amounted to RM22.4m, marking a significant yoy growth of 110.5%, but it experienced a qoq decline of 23.4%. The segment's performance in the quarter was driven by increased sales of auto components, lubricants, and Aerospace's parts, aligning with robust vehicle sales and the ongoing recovery in air travel momentum. However, the lower PBT on a quarterly basis, despite higher revenue, can be attributed to the impact of unfavorable exchange rates during the quarter.

Comments

• Backlog order stronger than expected. The management guided a strong orderbook for UMW Toyota (50k, which is the same as previous quarter) and Perodua (192k, slightly lower than last quarter's 200k). The orderbook's strength has surpassed our projections, driven by the continued demand stimulation from the launch of several car models.

• Expecting strong performance in 1H23… followed by easing supply chain constraints and a robust backlog of vehicles 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 1H23. Amid the global economy slowdown and interest rate upcycle, we expect UMW’s performance in 2HFY23F to soften.

Earnings Outlook

• After reassessing UMW’s orderbook, we have revised upwards our earnings forecasts for FY23F and FY24F to RM439m (previously RM355.6m) and RM406.2m (previously RM396.8m), respectively. These upward adjustments reflect our increased sales assumptions for both UMWT and Perodua, driven by a stronger than expected orderbook.

Valuation/Recommendation

• Despite the upward revision in earnings, we have maintained our HOLD call on UMW with an unchanged target price of RM3.96. This decision is based on our anticipation of a moderate growth outlook for the industry amidst the current challenging environment. As a result, we have assigned a lower PER to reflect this expectation.

• Our valuation is pegged at PE multiple of 10.5x (13x previously) on the FY23F EPS of 38 sen which represents a deviation of -0.5 stdv from its 3-year mean PER.

• We like the company for its strong recovering momentum on all their business segment especially aerospace segment and the leading position in the industry and the prime beneficiary from strong order of Toyota Vios and Perodua Axia. However, we opine that the share price is fully valued at the moment.

Source: JF Apex Securities Research - 29 May 2023