We obtained a first-hand impression of UMW’s fastest-growing segment, UMW Aerospace (which is the exclusive Rolls-Royce fan cases manufacturer), during our visit to its facility in UMW High Value Manufacturing Park, Serendah, two days ago. UMW Aerospace is also able to scale up the production of its existing products and expand its capabilities to venture into new products. We maintain our forecasts, TP of RM4.80 and OUTPERFORM call.

We recently visited UMW Aerospace’s operations which comprises: (i) front cases manufacturing and assembly machine, (ii) rear cases manufacturing empty machine plot ready for future assembly, and (iii) a new exclusive chemical milling plant (floor are chemically treated to endure 700-800 degrees temperature).

UMW Aerospace to turn profitable in 2023. UMW Aerospace returned to profitability in 4QFY22, and UMW guided for a full-year profit for FY23. We estimate fan cases sales volume to double in FY23, at 192 units compared to 96 units (+37% YoY) in FY22, with full capacity of 250 units expected by FY25. Additionally, UMW also receives a fixed margin under a cost-plus model agreement and is able to fully pass through fluctuation of input costs to Rolls-Royce with natural forex hedging mechanism (sales and materials costs in USD). Additional upside in profitability could come from economies of scale on higher volumes and improved efficiency in manufacturing processes.

Recall, UMW Aerospace secured its first contract in 2015 worth RM830m for 25+5 years to manufacture front fan cases and assemble them into complete units (for Trent 1000 and Trent 7000 aircraft engines), for shipment to Rolls-Royce UK. The contract took two years to take off with maiden delivery in 2017, and it achieve break-even at the EBIT level in 2019, and saw its first pre-tax profit in 2020 at RM1.7m. However, it slipped back to losses of RM33m in FY21 due to the pandemic lockdown, but pared its losses to RM9.4m in FY22.

New market opportunities. UMW Aerospace is able to scale up the production of its existing products (see page 2), and further expand its capabilities via new collaboration to venture into new products. In April 2023, UMW secured a second contract worth RM1b for 15 years to exclusively manufacture rear fan cases which was previously imported from a North American supplier.

The new chemical milling plant and related processes to manufacture the rear case will undergo trial run in 2024, with its first delivery by 2025 at max capacity matching the front cases at 250 units. Subsequently, the new exclusive chemical milling plant, which is the only one in Asia, has received several requests from local OEMs for future collaboration.

Forecasts. Maintained.

We also maintained our Sum-of Parts (SOP) derived TP of RM4.80 (see page 3) which already includes its aerospace segment’s valuation given the recurring order from Rolls-Royce that reflects well on UMW’s credibility and operational efficiency. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5)

Source: Kenanga Research - 16 Jun 2023