We anticipate 9M18 results to come in at c.83% of both our/consensus full-year estimates, which we deemed to be within expectations as we expect slower 4Q sales post new SST implementation. We believe that the proposed MBMR/Perodua takeover uncertainty has been removed following the lapsed of the proposals on 31st October 2018. UMW will not be pursuing the acquisition and the rights issue. Upgrade to OP from MP with unchanged TP RM5.50.

Expect 9M18 to be within expectations. We expect 3Q18 CNP at RM116.5m (compared to core loss of RM29.8m in 3Q17), which is due to be released by end-November 2018, as we conservatively assume the 3Q18 CNP is at the same level as 2Q18 CNP (at RM116.5m). We attributed this to the stronger UMW Toyota Motor 3Q18 unit sales of 21,370 units (+12% QoQ, +37% YoY), however, netted off by slower 38%-owned Perodua sales at 51,105 units (-17% QoQ, -2% YoY), from the short-term supply disruption for its all-new Perodua Myvi, which has been rectified recently. This implied 9M18 CNP at c.RM303.4m (compared to core loss of RM218.9m), which is at c.83% of both our/consensus full-year estimates. We deemed the results to be within expectations as we expect slower 4Q sales post new SST implementation, but will be cushioned by the usual year-end promotion and special event, KLIMS 2018. Note that, 9M18 UMW Toyota Motor unit sales is at 53,079 units (+11% YoY) and Perodua unit sales at 168,203 units (+11% YoY).

Automotive and Equipment to boost products range. As of to-date, UMW has launched the all-new Toyota CH-R, all-new Toyota Harrier, 3 new Lexus models, and recently, all-new Toyota Rush. UMW will launch all-new Toyota Camry in Nov’18 and one new model, which is not under its fleet now at their new plant (to start production in 1Q19), which we foresee the emergence of 2019 Toyota Yaris Hatchback. The new Bukit Raja plant can push 50k units in one shift with automation of more than c.70% compared with its current Shah Alam plant, which can only push 75k units on two shifts at c.30% in automation. On the other hand, Perodua’s entry level segment (2018 sales target at 209k) continued to gain traction supported by the all-new Perodua MyVi (120k booking, 68k delivered) and expecting to launch the all-new Perodua SUV D38L in 1Q19. For Equipment, the group will continue to leverage on partner’s (KOMATSU & TICO) strength to boost product range and market penetration, while, expanding total solutions services.

UMW Aerospace to hit breakeven level by FY20? UMW Aerospace, under the M&E segment, is expected to trim its losses to c.RM20m level in FY18/FY19 (from losses of c.RM60m in FY17) before reaching breakeven level in FY20 considering that some front-loaded investments need to be amortised. UMW Aerospace has delivered 6 fan cases for FY17 and additionally, expects to ramp up its production to 80/100 fan cases for 2018/2019 and 150 fan cases by 2020 before hitting full capacity of 250 fan cases by 2021.

Upgrade to OUTPERFORM from MARKET PERFORM with an unchanged Target Price of RM5.50 based on 17x FY19E EPS, which is the 5-year historical mean PER. We believe the proposed MBMR takeover uncertainty has been priced in with the share price retracement of 27%, below pre-proposals level. Note that, the MBMR/Perodua takeover proposals have lapsed on 31st October 2018.

We like UMW for its (i) expected strong sales growth from capacity expansion up to 125k units (from the current 75k units) with improved cost-efficient automation, (ii) strong Perodua associates earnings supported by back-logged booking of the all-new Perodua Myvi, and (iii) narrower losses from its M&E segments. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 1 Nov 2018