News

In an announcement to Bursa Malaysia yesterday, UMW announced that two of its wholly-owned subsidiaries namely UMW M&E and UMW Aerospace (newly acquired for RM2.00 under the same announcement), have signed a 25-year agreement with Rolls-Royce plc (RR), with an option to extend up to five years, to manufacture and assemble fan cases for its Trent 1000 aero engines.

RR is one of the world's leading producers of aero engines for large civil aircraft and corporate jets. It is also the second largest provider of defence aero engines and services in the world.

This agreementforms part of RR's programme to incorporate Malaysia within its supply chain in South East Asia and as envisaged by the national Aerospace Blueprint 2016-2030 to establish strong a aerospace industry in Malaysia, where UMW will build a facility capable of producing, manufacturing, assembly and supplying the abovementioned products.

Separately, it was reported in the news that as part of the deal, UMW will also collaborate with MARA through the latter's subsidiary company Mara Aerospace and Technologies S/B to establish an apprentice training centre with the availability of technical skillsets in aerospace hard metal machining prior to the launch of the manufacturing plant.

The project cost was estimated to be in the region of RM830m, according to the same news portal.

Comments

While the details are scant for us to gauge the earnings quantum and financing contribution needed to be forked out by UMW at this juncture, we are POSITIVE on the deal as such venture into the aerospacecomponent manufacturing industry made the group the first and Tier 1 supplier to RR in Malaysia.

Moreover, this agreement will create new and stable revenue stream for the group, assuming proper execution in place. Note that a listed industry player- Sam Engineering which is offering similar products to different customers have seen stable earnings and huge backlog orders amid the booming aerospace industry.

If we were to assume the whole project cost to be bared by UMW through internal funds, we see marginal impact to its balance sheet as its net gearing in FY16E will only increase from 0.1x to 0.2x.

Outlook

For FY15, we are expecting its Automotive segment to register a lower combined total sales (Perodua, UMW Toyota) of 293k units (-2% YoY) vs. management’s forecast of 298k units amidst the lack of new attractive models as well as the weaker sales performance in 1Q15.

On the Oil and Gas segment, we expect headwinds with oil prices expected to remain soft. With major oil companies implementing cost-cutting measures and delaying capital expenditures, we expect downward pressure on the charter rates in the near-term.

Forecast

We make no changes to our FY15E-FY16E NPs at this juncture in view of the scarcity of details.

Rating

Maintain MARKET PERFORM

Valuation

We maintain our TP of RM11.17 based on Sum of Parts (which implies 15.1 FY16 PER, which is close to -1SD below its 3-year PER mean).

Risks toOur Call

Higher-than-expected vehicle sales.

Earlier than expected recovery in Oil & Gas segment.

Better than expected drilling margins.

Source: Kenanga Research - 13 Aug 2015