UMW’s 1HFY22 results met expectations. It chalked up both strong sales (as the economy reopened) and margins (due to high-margin new models and reduced competition at its manufacturing division amidst supply constraints in various industries). Associate Perusahaan Otomobil Kedua Sdn Bhd also turned in excellent results thanks to strong car sales. We maintain our forecasts, TP of RM4.40 and OUTPERFORM call.

1HFY22 results met expectations with a core profit of RM197.2m (after adjusting one-off impairments of RM11.2m) making up 55% and 57% of FY22 forecasts of ours and the market’s.

1HFY22 turnover rose 37% YoY driven by: (i) strong sales from automotive division (+41%) due to robust demand for Toyota (+35% to 45,911 units) and Perodua (+31% to 127,343 units) as the economy reopened, (ii) strong automotive sales which boosted its manufacturing & engineering division (+16%) especially demand for its OEM products (i.e. Toyota & Perodua engine oils) while its aerospace (Rolls-Royce fan cases) rode on the reopening of international borders, and (iii) the recovery in equipment division (+17%) as construction and manufacturing activities returned to normalcy. The share of profit from associates rose sharply (+72%) driven by strong car sales (particularly Myvi, Axia and Bezza) at Perusahaan Otomobil Kedua Sdn Bhd. Its core PATAMI almost tripled due to better margins at both vehicle dealerships (due to high-margin new models, i.e. Toyota Corolla Cross, Toyota Hilux, Perodua Ativa and Perodua Alza) as well as manufacturing division (auto parts, lubricant and aero engine fan casing due to reduced competition amidst supply constraints in various industries).

Outlook. We like UMW for: (i) the mass-market marques under its vehicle dealership business, i.e. Toyota and Perodua, but not without high-margin models such as Perodua Alza and Toyota Veloz, (ii) the strong earnings visibility at its vehicle dealership business backed by order backlogs of >300k units of vehicles, and (iii) it being a cyclical and recovery play as it is in the heavy/industrial equipment business, apart from manufacturing of aero engine fan cases.

Toyota and Perodua have sales targets of 80,000 units (+12%) and 247,800 units (+30%) for 2022, respectively. Perodua recently launched the all-new Alza to replace the older model. Thus far, it has clocked up order backlogs of 41k units with the waiting period extending beyond 12 months. Its equipment division will continue to work with partners Komatsu and TICO. It has also made a foray into the collaborative robot or cobots space (cobots are robots designed to work alongside human on the factory floor) with partner Universal Robot A/S, while UMW Aerospace will benefit from the resumption of air travel globally.

Forecasts. We maintain our forecasts and TP of RM4.40 based an ascribed 13x on FY23F, which is at a premium to the auto sector’s average forward PER of 11x to reflect its dominant position in the auto industry with an aggregate (including those under its associates) market share of >50%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (ii) supply chain disruptions, (iii) escalating input costs, and (iv) a global recession hurting demand for industrial/heavy equipment.

Source: Kenanga Research - 29 Aug 2022