UMW Holdings Bhd's 51%-owned UMW Toyota Motor Sdn Bhd has officially announced that it will spend RM2b (UMW’s investment portion to be RM1.02b after equity accounting) to build a new passenger car manufacturing plant in Bukit Raja, Selangor. While we are positive on the news, this does not alter our conservative view on the group’s near-term prospect which is overshadowed by the bleak macroeconomic conditions as well as its soft Oil & Gas segment. No changes made to our FY16E/FY17E earnings estimates for now as the plant will only start commencing early 2019. Maintain UNDERPERFORM with an unchanged SoP-derived TP of RM4.95.

New manufacturing plant to cater for future demand. UMW Toyota Motor Sdn Bhd (51%-owned by UMW) has officially announced that it will build a new passenger car manufacturing plant in Bukit Raja, Selangor costing RM2.0b in investment (UMW’s investment portion to be RM1.02b after equity accounting) which will be derived internally over the next three years. We gather that the new manufacturing plant (670k sq m in size) which will be used to produce both passenger as well as energy-efficient vehicles, has a production capacity of 50k units annually (based on 1 shift) and could be ramped up further. The construction should begin in the 2H2016 with completion targeted by early 2019.

We are positive on the move as this signifies UMW’s commitment in increasing Toyota CKD’s products offering. Moreover, the new plant with aims to: (i) segregate the production of passenger as well as commercial vehicles, (ii) complement and streamline the current plant in Shah Alam, which is already running at 80%-90% on the production capacity of up to c.80k units (based on two shifts), (iii) improve operational efficiency with the higher automation level of 70% (vis-a-vis the current 30%) thus leading to better products quality, could be yielding UMW’s Toyota with better competitiveness in terms of production cost efficiency as well as product offering in the long-term. Besides, we believe UMW’s Toyota production cost could partly benefit from the incentives eligibility outlined in the 2014’s National Automotive Policy for Energy-Efficient Vehicles production.

Near term outlook remained bleak. Having said that, our positive takes on this plant do not alter our view on the group’s near-term prospects. On the Automotive segment, management has guided a lower combined total sales (Perodua, UMW Toyota) of 296k units (-7k units) in FY16 vs. our latest forecast combined total sales of 290k units (-6% to 79k for Toyota with unchanged Perodua’s 216k units;) with unchanged sales volume assumptions from Perodua (216k units) but lower sales from UMW Toyota (80k units, -7k units) on lacklustre demand. Meanwhile, we continue to believe that margins will remain subdued, dragged by higher operating costs from marketing and high import cost on unfavourable currency fluctuations. On the Oil & Gas segment, we expect headwinds in the Oil & Gas segment with oil prices expected to remain soft in the medium-term. With major oil companies implementing cost-cutting measures and delaying capital expenditure, we expect continual downward pressure on the charter rates at least in the medium-term. Moreover, four rigs (Naga 2, 3, 5 and 6) are already out of charter contracts, exerting further downward pressure on the group’s near-term earnings.

Maintain UNDERPERFORM with an unchanged SoP TP of RM4.95. No changes to our earnings estimates for now as our capex assumption of RM1.6b for each FY16-FY17 have been accounted for that. Meanwhile, earnings accretion could only be as seen in early 2019.

Source: Kenanga Research - 26 May 2016