• U/G BUY from Neutral, new MYR5.10 TP from MYR3.35, 30% upside. With the latest promising Toyota and 38%-owned Perodua’s orders, we get greater visibility on 2023 earnings. The likely popular all-new Axia could further add to Perodua's existing 220k orders, boosting earnings. UMW's aerospace wing should also have begun turning around in 4Q22, with a recovery in FY23. The stock now trades at an attractive 10x FY23F P/E.

• UMW Toyota (UMWT) will launch five new Toyotas today. Car news portal paultan.org said the five are the GR Corolla, GR86, Supra MT, Hilux GR Sport, and Corolla Cross GR-S. While they are not volume drivers, it is widely rumoured that UMWT will launch the all-new Vios and Innova this year, which could drive volumes. The new Vios has been launched in Laos, Thailand, and Indonesia. The new Innova debuted in Indonesia. In 2022, UMWT initially set a 73k sales target and then raised it to 80k – by end- 2022, it had sold 101k units. We see UMWT selling 100k units in 2023.

• Perodua is targeting 314k unit sales in 2023. Perodua currently has 220k units of orders on hand, including for the new Axia. This implies that it only needs 94k more orders in the remainder of 2023 to achieve its target. We think the likely-popular all-new second-generation (gen) Axia will help further drive orders. We see Perodua booking FY23 unit sales of 320k, backed by its 330k production target.

• The return of the aerospace wing. We expect this unit to post a meaningful FY23 turnaround – possibly having begun this in 4Q22. At the 3Q22 earnings briefing, management said the aerospace wing had seen such a turnaround, with fan case orders recovering in tandem with global air travel resumption. We think this segment's FY23 performance should be comparable with FY19's.

• We lift FY22F-24F earnings by 4%, 40%, and 18%. The outsized FY23F revision is mainly on: i) Bearish pre-revision estimates (premised on soft volumes), ii) increasing Perodua unit sales to 320k from 220k (which makes up c.25% of the earnings jump), and iii) lifting UMWT unit sales to 100k from 80k. Due to Perodua's absorbing of higher COGS in 2023, we assume lower margins. We have also assumed lower ASPs on Axia's higher contribution to the product mix. Recap: Perodua’s associate contributions averaged 43% of PBT in the past two years. We estimate this to rise to 45% in FY23 on Perodua’s relatively stronger contributions.

• U/G BUY. We lift our TP to MYR5.10, which is based on 13x FY23F EPS from 12x. The higher P/E reflects UMW's improving prospects across its business segments, namely auto. The 13x is close to its 5-year mean of 14x. The TP includes a 2% ESG discount. Our upgrade is mainly premised on stronger-than-expected orders and improving sector prospects. With strong Perodua and Toyota orders, 2023 is poised to be a blockbuster year for UMW. Key risks include softer-than-expected orders and sales, and resurgent supply chain disruptions.

Source: RHB Research - 20 Feb 2023