• Significantly lower USD locked in for 2H17, a chance for volume to outperform

• Monetisation of Serendah land kickstarting soon, exploring methods to bring forward value unlocking

• Disposal of non-listed O&G well on track

• Reaffirm BUY at unchanged TP of RM7.20/share.

We attended UMW’s analyst briefing yesterday. Below are the key takeaways:

A chance to outperform? We gather that sales have picked up since launch of the four facelift models and new variants this month i.e. Vios / Fortuner / Hilux / Innova and group is well on track to achieve, if not exceed its FY17F target volume of 70K units (which implies a conservative 9.8%yoy growth). YTD, Toyota TIV has far outstripped industry growth at +21.7% (vs. industry: +4.7%).

Addressing forex volatility for autos. (1) Increasing local content e.g. Vios localisation rate increased from 51% to 58% for the current facelift model launched late FY16 - besides reducing forex exposure, UMW also benefits from lower effective excise duties (2) Increasing CKD models from the current six CKD models (and 6 CBU models); most of this will materialise after the new Bukit Raja plant is up by FY19F (3) Expanding contribution from after sales operations. UMW Toyota is also looking to rationalise its distribution network (its own branches) and focus on expanding dealerships (sales & service outlets operated by 3rd parties). Other than UMW’s own measure to address forex volatility, we gather that the principal, Toyota Motor Corp (TMC) has also been providing incentives to UMW on a case by case basis since early FY17F.

3Q17 to see much lower USD rates. Average rates incurred for 1H17 was USD:RM4.37 (1H16: RM4.24). UMW has locked up rates till Sep17 at a much lower RM4.24 (3% improvement vs. 1H17) and this is expected to reduce further to RM4.21 in 4Q17. Spot rates currently stand at an even lower RM4.19. This should provide a big kicker to auto earnings in 2H17. Every 1% change in USD impacts FY18F earnings by 4.7% on our estimates.

CHR may come sooner than expected. The CHR is planned for launch in 1Q18. This is much earlier than previous indication of 3Q18 launch based on our earlier channel checks. The CHR will initially be brought in as a CBU. While registration of interest has been encouraging (>3K based on our ground checks), conversion into actual bookings is very dependent on pricing, which is expected to be finalised within the next month or so. A new CKD Camry is also on track for FY18F launch.

Source: MIDF Research - 20 Sept 2017