We came away feeling comforted on its prospects after a meeting with its investor relations team. The strategic exit from O&G sector is on track by end-2018, which is expected to improve profitability and balance sheet. No changes in our earnings assumption and we keep our Target Price unchanged at RM5.77. We reiterate our MARKET PERFORM call on UMWH in view of single-digit growth in its automotive segment sales volume pending the completion in its new Bukit Raja Plant and the gestation period for its Rolls-Royce plant.

Strategic exit of O&G segments on track by End-2018. With the completion of the distribution and share capital reduction, UMW-OG has been demerged from UMWH group on 11th July 2017. Correspondingly, the strategic exit from unlisted O&G segment is expected to be completed by end-2018. With the exit, improvement in the group’s profitability is expected in the 2H17. Additionally, the exit is expected to strengthen the group's balance sheet with reduced borrowings (estimated at RM2.9b), generating significantly lower net gearing (estimated net gearing for FY17E at 0.4x). Overall, the exit would reduce constraints on cash flow and enable the group to embark on various asset allocation strategies.

Automotive segment, higher sales volume for 1H17. As per MAA’s data, automotive segment sales volume for 1H17 registered a higher growth of 7% to 133,808 units, attributed to the introduction of attractive new models and aggressive promotion. Correspondingly, both Toyota+Lexus and Perodua are on track to meet the targeted total sales volume of 70,000 units and 202,000 units with the 1H17 volume currently at 49% and 49%, respectively. We expect the group to introduce a few new variants, which are the face-lifted variants of Toyota existing models (Vios, Camry, Hilux, Fortuner), Lexus LC 500, Toyota CH-R, and replacement for Perodua Myvi by Perodua. For future growth, the new Bukit Raja manufacturing plant (670k sq m in size) is expected to be operational in early 2019, for production of both passengers as well as energy-efficient vehicles, with initial production capacity of 50k units annually based on one shift.(Current plant at 75k units annually based on two shifts).

M&E segment, gestation period until 2019. The group will re-focus on venturing into high-value manufacturing, starting with UMW Aerospace Sdn. Bhd. The group will be the single source Tier-1 supplier for Rolls-Royce’s fan case with expected first delivery in Oct 2017 to the engine assembly facility in Seletar Aerospace Park, Singapore. The group is expected to manufacture the fan case in single-digit units for FY17, double-digit units for FY18 and reaching full operation capacity in FY19 (maximum capacity at 250 units), under 25+5 year contract with revenue in USD. The UMW Aerospace plant has only taken up 30 acres (from 861 acres) in Serendah Land, which open up the possibility for the group to monetise the vast land to create high-value manufacturing centralised activities.

Equipment segment to be repositioned to urbanised sectors. The group will reposition their heavy equipment business towards more urbanised sectors such as construction with possibilities of growth through regional expansion. We foresee a gradual increase in volume sales of industrial equipment capitalizing on mega projects (worth over RM550b), supported by agriculture & plantations industry, as well as expansion of equipment leasing business in which the group plans to further increase leasing revenue contribution to 50% of total equipment revenue (currently, at 30%).

Outlook. The strategic exit from the O&G industry is expected to improve the group’s profitability with more solid balance sheet. Additionally, the anticipated new car models should excite consumers’ sentiment bringing in more sales volume to the group. Nonetheless, we maintain our neutral stance on UMWH in view of the single-digit growth in its automotive segment sales volume pending the completion in its new Bukit Raja Plant and the gestation period for its Rolls-Royce plant. No changes in our earnings assumption. We keep our TP unchanged at RM5.77 based on 13.0x PER against FY18E EPS, where earnings are exclusive from O&G segment. Reiterate MARKET PERFORM call.

Source: Kenanga Research - 3 Aug 2017