UMW’s 1QFY23 results met expectations. Its recorded strong sales  of Toyota, Lexus and Perodua vehicles, with additional earnings  kicker coming from associate Perusahaan Otomobil Kedua Sdn  Bhd on the back of higher vehicles production. Meanwhile, its manufacturing & engineering (M&E) and equipment segment also  benefitted from the economy re-opening. We maintain our  earnings forecasts, TP of RM4.80 and reiterate our OUTPERFORM  call.

UMW’s 1QFY23 core net profit of RM123.9m came in at 30% and 31%  of our full-year forecast and the full-year consensus estimate,  respectively. We deem the results within expectations as we expect a  slightly slower 2QFY23 due to fewer working days and plant shutdown  during the Hari Raya period for annual maintenance.

YoY, 1QFY23 revenue rose 20% driven by: (i) strong sales from  automotive division (+18%) due to robust demand for Toyota/Lexus  (+12% to 25,219 units) and Perodua (+27% to 78,564 units) vehicles as the economy reopened, (ii) strong automotive sales which boosted its manufacturing & engineering division (+42%) especially the demand for its OEM products (i.e. Toyota & Perodua engine lubricants) while its aerospace (Rolls-Royce fan cases) segment rode on the reopening of international borders, and (iii) the recovery in equipment division  (+17%) as construction and manufacturing activities resumed. The share of profit from associates rose sharply (+13%) driven by strong car sales (such as Bezza, Alza, Axia, Myvi, Ativa and Aruz) at Perusahaan  Otomobil Kedua Sdn Bhd as well as lower cost of production.

Core net profit rose by a larger 25%, due to better margins at: (i) its vehicle dealerships driven by high-margin new models, i.e. Toyota  Corolla Cross, Toyota Hilux, and Perodua Alza, and (ii) its manufacturing division (which produce auto parts, lubricant and aero engine fan casing) due to reduced competition amidst supply constraints in various industries.

QoQ, 1QFY23 revenue came in flat from a high base during the preceding quarter (on year-end promotions) with softer sales recorded by Toyota/Lexus (-16%) and Perodua (-8%), mitigated by the stronger sales at both M&E segment (+10%), and equipment sales (+16%) due to reasons as mentioned above. Nonetheless, the share of profit from associates rose 61%, mainly contributed by Perusahaan Otomobil  Kedua Sdn Bhd with the ramp-up in production level for the all-new  Perodua Axia, at significant reduction in costs as prices of commodities  and key components softened. Coupled with lower effective tax rate of  18.7% vs. 21.3% in 4QFY22, core net profit rose by 19%.

The key takeaways from the results briefing are as follows:

1. UMW reiterated sales guidance for Toyota/Lexus of 93k units (-8%)  in FY23. No change to our assumption at 93k units for FY23 and 95k  units (+2%) for FY24. It guided for five all-new Toyota models in 2023  (all-new Vios, Toyota GR86 and GR Corolla already launched in Feb,  all-new Toyota Innova Zenix in June, and one new model during the later part of the year). UMW’s booking backlog for Toyota/Lexus vehicles currently stands at 50k units.
    
2. UMW works on the basis that Perodua’s sales target of 314k units (+11.3%) in 2023 will be achievable, backed by Perodua’s  annual production capacity of 320k units (our forecasts for UMW and MBMR (OP; TP: RM4.70) are based on unit sales assumptions for Perodua of 314k and 320k in 2023 and 2024, respectively). Perodua’s current booking backlog stands at 190k units.
    
3. UMW believes the worst of Perusahaan Otomobil Kedua Sdn Bhd’s margin squeeze is over as: (i) the prosperity tax recognition has ended, (ii) higher production level from all-new Perodua Axia helps to run down the high-cost inventories at a  much faster rate, and (iii) prices of commodities and key components have since softened.
    
4. UMW said that its M&E division (auto parts, lubricant and aero-engine fan casing) continues to enjoy strong orders as supply constraints in various industries have affected its competitors’ productivity. UMW guided that its new smart lubricant plant will start operating in the 2H 2023, and will add 70% additional capacity, increasing its total capacity to 60m litres/year. This could expand the profit contribution of the segment from the current 13%, to 20% of group profit. This will enable UMW to capture new markets (various climate markets, other than focusing on tropical-based market) with improving margin on reduced costs and variation of products lines.

Forecasts. Maintained.

We also maintained our Sum-of Parts (SOP) derived TP of RM4.80 (see page 3). There is no adjustment to our TP based on  ESG given a 3-star rating as appraised by us (see Page 5).

We like UMW for: (i) the mass-market marques under its automotive business, i.e. Toyota and Perodua, but not without high-margin models such as Toyota Vios and Perodua Alza, (ii) the strong earnings visibility at its automotive business backed by order backlogs of >240k units of vehicles, and (iii) it being a reopening play, given the pick-up seen in its  heavy/industrial equipment business and manufacturing of aero-engine fan cases. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

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 May 2023