UMW’s 1HFY23 results met expectations. The results have become academic assuming SIME’s takeover of the company is to proceed and a Mandatory General Offer (MGO) is to be extended to all minority shareholders. We maintain our earnings forecasts, TP of RM5.00 and ACCEPT OFFER call.

UMW’s 1HFY23 core net profit of RM197m (excluding one-off disposal gain of industrial lands at Serendah amounting at RM218.1m), met expectations at 48% of both our full-year forecast and the full year consensus estimate.

YoY, UMW’s 1HFY23 revenue rose 20% driven by: (i) strong sales from automotive division (+14%) due to robust demand for Toyota/Lexus (+6% to 48,659 units) and Perodua (+14% to 144,690 units) vehicles as the economy reopened, (ii) strong automotive sales which boosted its manufacturing & engineering division (+37%) 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 (+21%) as construction and manufacturing activities resumed.

Its core net profit, however, only rose marginally dragged down by the weaker share of profit from associates (-8%) due to shorter working months in 2QFY23, especially at Perusahaan Otomobil Kedua Sdn Bhd.

QoQ, UMW’s 2QFY23 revenue rose 2% as weaker sales from automotive (-6%) and manufacturing & engineering division (-7%) due to shorter working months, was offset by the stronger equipment sales (+5%) from increased in construction and manufacturing activities.

However, its core net profit, plunged 41% dragged by the weaker share of profit from associates (-8%) especially at Perusahaan Otomobil Kedua Sdn Bhd as it closed a week for each Eid-ul public holidays for schedule maintenance (-16% to 66,126 units).

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 40k 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 200k units. Perodua has consistently achieved more than the monthly targeted production level, despite the shorter working months on the back of consecutive public holidays in Apr and Jun 2023

3. UMW said that its M&E division (auto parts, lubricant and aero-engine fan casing) continued to enjoy strong orders as supply constraints in various industries affected its competitors’ productivity. UMW guided that its new smart lubricant plant has started production in April 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 maintain our TP of RM5.00 which is the MGO price offered by SIME.

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 and industrial equipment business and manufacturing of aero-engine fan cases. However, we believe the MGO price is fair and hence maintain our ACCEPT OFFER call.

Risks to our call include: (i) failure of the proposed privatisation of UMW which could spark sell-down in its share price, (ii) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (iii) supply chain disruptions, (iv) escalating input costs, and (v) a global recession hurting demand for industrial/heavy equipment.

Source: Kenanga Research - 30 Aug 2023