Results

• UMW Holdings’s 2Q23 net profit stood at RM303.6mil, surging 125.8% QoQ and 183.2% YoY. Meanwhile, top line was recorded at RM4,513.4mil, reflecting growths of 2.3% QoQ and 20.3% YoY.

• For 1H23, the Group’s earnings stood at RM438.0mil, indicating a remarkable growth of 110.2% YoY. Concurrently, the Group’s revenue was recorded at RM8,923.3mil, rising 20.2% YoY.

• However, core earnings growth remained moderate. Excluding one-off gain of industrial land sale to Longi (RM218.1mil), the Group’s 1H23 core earnings has only shown a modest growth of 6% YoY.

• Results within expectation. 1H23 core earnings have reached 50% of our full-year forecast and 53% of the consensus estimate thus far.

Comments

• Automotive segment’s 1H23 revenue rose by 13.8% YoY due to higher number of vehicle sales during the period. The Group's automotive sales surged by 11.5% compared to the same period in the previous year, reaching a total of 193,349 units in the 1H23, in contrast to 173,254 units in 1H22. The segment continues to show robust growth despite the expiry of the SST tax exemption due to outstanding order backlog and introduction of new model. Consequently, PBT has shown a 5.2% YoY growth which is in line with this performance.

• The Equipment segment continued to be a solid contributor to earnings. The Equipment segment posted higher revenue and PBT at 20.7% YoY and 49.4% YoY respectively thanks to higher delivery of heavy equipment sales which was mainly driven by demand from construction, mining, and agriculture sector.

• Excellent growth from the Manufacturing & Engineering segment. The segment posted 1H23 revenue of RM623.3mil (37.4% YoY) and RM44.2mil PBT (86.6% YoY). PBT margin has expanded by 4.5ppts YoY due to higher contribution from all subsegments. Notably, the aerospace subsegment returned to profitability led by strong demand for aircraft carrier with the reopening of borders. Management has expressed optimism about the sustainability of the aerospace segment's momentum throughout 2H23.

• Following the announcement of SIME DARBY merger proposal, UMW share price has surged rapidly, closing at RM4.80 yesterday. According to management, the deal is currently in progress, although there hasn't been direct communication with the relevant stakeholders from Toyota and Komatsu thus far. Nevertheless, our viewpoint is that the deal still maintains a strong likelihood of materialising, primarily because it involves a straightforward transfer of ownership stake from PNB to Sime Darby.

• Positive momentum building up for the auto segment for FY23. The MAA has increased its total industry volume (TIV) target for FY23, moving from 650,000 units to 725,000 units. Despite the optimism, management has retained their initial sales target at 93,000 units for Toyota/Lexus and 314,000 units for Perodua.

• Outstanding orderbook remained strong. To date, total outstanding order backlog for both Toyota and Perodua brand stood at 40,000 units and 200,000 units respectively. Based on the backlog order, we believe management target for Perodua is highly achievable for FY23 as it already has sold 144,690 units in 1H23. On the other hand, Toyota/Lexus has only achieved 48,659 units sales in 1H23, slightly falling short of the full year target after taking into account the outstanding orderbook.

Earnings Outlook / Revision

• No changes to our forecast for FY23. However, we decided to revise upwards our earnings forecast for FY24 to RM418.2mil (previously RM406.2mil) after taking into consideration in the improvement of the aerospace segment as well as the stronger-than-expected demand from the automotive segment.

Valuation and Recommendation

• We set our TP at RM5.00 (previous TP RM3.96) to match the offer price from Sime Darby. Our valuation is now pegged at 13.8x PE multiple with FY24F EPS of 36.0 sen.

• We would recommend to SELL given that 1) the share price has surged to a new peak attributed to the acquisition premium and 2) there remains a potential risk that the deal could collapse if stakeholders are unable to come to a consensus.

Source: JF Apex Securities Research - 30 Aug 2023