Key takeaways

• Following our recent site visit to the Group's Aerospace manufacturing plant in Serendah, accompanied by the Aerospace sub-division’s management, we have formed an optimistic view on the segment supported by the recovery of the aerospace industry postpandemic. Nevertheless, we maintain our Hold call as the contribution from the segment was minimal to the Group as its revenue only accounted for 1% of FY22 revenue.

• Aerospace business returned to the black. The Aerospace business has successfully turned around, transitioning from losses to profitability in 4Q22 and 1Q23. This positive outcome mainly attributed to improved volume and enhanced margins, primarily driven by the realization of economies of scale within the segment.

• Serendah plant. The plant facility’s principal activity is to manufacture and assembly fan cases exclusively for RollsRoyce’s Trent 1000 and Trent 7000 aircraft engines. UMW Aerospace entered into an agreement in 2015 with Rolls-Royce to undertake the manufacturing and assembly of fan cases for the aircraft engines.

• 15 years rear cases contract. To recap, UMW has received a 15 years contract worth RM1bil from Roll-Royce to manufacturer the rear cases for both Trent 1000 and Trent 7000 engine and expected to commence in FY25. Rear cases are an integral component of the complete unit of aircraft engine fan cases. Previously, UMW manufactured the front case and middle part of the fan cases, while importing the rear cases from the United States for assembly. With the in-house manufacturing of rear cases in the future, we anticipate further growth in the segment's profitability for FY25F. This development is expected to lead to incremental margin expansion.

• Capacity of 250 units fan cases per annum. The plant’s current capacity is 250 fan cases per year, and in FY23 to date, UMW Aerospace has shipped more than 100 units. Looking ahead, we anticipate that UMW Aerospace will be able to deliver approximately 200 units for the full year, a notable increase compared to the 96 units delivered in FY22. This reflects the positive and rebound of the tourism and aerospace industries post-pandemic.

• Manufacturing & Engineering segment. Currently the aerospace business is reporting under the M&E segement. 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%. In FY22, the aerospace business accounted for 25% of the total M&E segment’s revenue.

Earnings Outlook  

• We reiterate our earnings forecasts for FY23F and FY24F at RM439m and RM406.2m respectively.  

Valuation/Recommendation  

• 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 automotive industry amidst the current challenging environment.  

• Our valuation is pegged at PE multiple of 10.5x 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 - 16 Jun 2023