• Stay BUY, new TP of MYR5 from MYR5.10, 27% upside. UMW’s 4Q22 results disappointed, mainly on weaker-than-expected associate contributions due to 38%-owned Perodua’s high material and input costs. However, the aerospace unit turned around, with delivery volumes up 37% YoY. We think Perodua’s 314k and Toyota’s 93k sales targets for 2023, and a stronger aerospace segment, should bode well for UMW, while a higher dividend payout implies a decent 4% FY23F yield.

• FY22 core earnings of MYR399m (4Q22: MYR106m) are only at 86% and 90% of our and Street projections. Despite Perodua’s higher volume (+24% QoQ), the associate contribution dropped by 7% QoQ, as higher material and labour (plus overtime) costs weighed down 4Q22 numbers. That said, management has guided that Perodua is now containing costs better. UMW’s final DPS of 11.2 sen brings FY22 DPS to 14.2 sen (vs our 10 sen estimate). This represents a 40% DPR, a multi-year high, and a level that management is comfortable maintaining in the foreseeable future.

• The aerospace segment returns. While the aerospace operation is lumped under its manufacturing and engineering (M&E) segment, it beat our expectations with a stronger-than-expected PBT margin of 10.5%, which management has indicated is sustainable in the coming quarters, with the return in fan case volumes, boosted by the recovery of air travel. The utilisation of the aerospace plant averaged <40% in 2021, ranged 50- 60% in 2022, and is expected to range between 70% and 75% in 2023.

• Auto outlook. Perodua’s 220k orders is 94k units short of its 314k 2023 sales target. We think the continued popularity of the newly launched Axia, backed by its 330k production target, will allow it to hit a record-breaking year (320k unit sales). With a 93k unit sales target, UMW Toyota (UMWT) already has 50k orders in hand. Partially driven by the expected launch of the all-new Vios in March, we forecast UMWT to hit 100k unit sales in 2023.

• We trim FY23F-24F earnings by 3% each, mainly as we assume lower Perodua contributions due to elevated costs. We lift the ESG score to 3 from 2.9, as we upgraded its “Environmental” score to 3 from 2.7 for its greater reliance on solar energy, continued efforts to introduce more eco- friendly products across its businesses, and campaigns and initiatives to reduce waste and support reforestation.

• Our TP drops to MYR5 after imputing the lower earnings and higher ESG score. Our TP reflects an unchanged 13x FY23F P/E, close to its 5-year mean of 14x. Maintain BUY on Toyota and Perodua’s likely strong 2023, and for the aerospace unit’s recovery prospects. UMW is trading at an attractive forward c.10x FY23F P/E. Downside risks include weaker-than- expected orders and deliveries, softer-than-expected margins, and a stronger-than-expected USD/MYR rate.

Source: RHB Research - 28 Feb 2023