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Stay NEUTRAL, with new MYR3.10 TP from MYR2.90, 1% upside. 1H22 earnings beat our and Street estimates, mainly due to stronger-than- expected margins, as UMW’s cost containment measures have cushioned the impact of a strengthening USD/MYR and costlier car parts. In light of the strong YTD UMW Toyota (UMWT) sales, management raised UMWT’s target to 80k from 73k, and we lift our FY22F to 88k from 85k, given the easing supply chain issues. Still, softening FY23F sales are of concern.
Results beat. 2Q22 profit of MYR102m brought 1H22 profit to MYR211m, exceeding expectations at 65% and 61% of our and Street full year estimates. The deviation is mainly due to stronger-than-expected margins, as revenue was in line. No dividends declared, as expected.
Results highlights. QoQ, 2Q22 PBT grew 6% mainly driven by the recovery of its Equipment and Manufacturing & Engineering segments, which both saw margin recovery. Automotive revenue grew 1.5% but PBT slipped 1.4% as margin eased slightly, which we attribute to costlier car parts and a stronger USD/MYR during 2Q22. Despite that, a higher effective tax rate weighted and core profit fell 6% QoQ, all segments recovered strongly against a locked-down 2Q21.
Orders are gradually recovering MoM, as August orders rose from July, when Perodua and UMWT orders fell by 20-30% from 1H22 average. Currently, UMWT has c.50k backlog orders, and Perodua c.250k. In July, Perodua had 24k new orders, with the Alza alone contributing 9k. Despite striking a cautious tone on 2023 due to macroeconomic headwinds, management thinks that UMW could benefit from downtrading, given the group’s affordable options of Toyota Vios & Yaris, and all Perodua models.
Supply chain issues are easing, as UMWT is currently running at close to 100% capacity, thanks to its alternative sources for parts. Perodua’s vendors, on the other hand, are still facing foreign labour shortages.
Sales target. UMWT raised its 2022 sales target to 80k units, from 73k. YTD-July, UMWT has sold 52.5k units, and aims to deliver 8k units each month for the remainder of 2022, which we think could help it achieve close to 90k units. Thus, we lift our UMWT target to 88k from 85k. We also lift Perodua’s FY23-FY24 targets to 210k-220k from 200k-210k in light of the strong demand for the all-New Perodua Alza.
Forecasts. We lift FY22F earnings by 27% on higher auto margin assumptions and stronger UMWT sales, as well as FY23F-FY24F earnings by 6-3% on higher Perodua sales. Higher FY23F earnings lift our TP to MYR3.10, from MYR2.90, based on an unchanged 12x FY23F P/E. Our TP includes a 2% ESG discount. Despite the strong results and an anticipated strong FY22, we remain cautious on the softening UMWT and Perodua sales in FY23F, especially given Perodua’s disproportionate vulnerability to macroeconomic headwinds.
Key risks: Weaker-than-expected orders and deliveries, softer-than-expected margins, and stronger-than-expected USD/MYR. The converse represents the key upside risks.
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