• Keep BUY and MYR5 TP, 37% upside with c.4% yield. UMW’s 1Q23 results are within expectations. Despite a 10% drop in automotive volume in 1Q23, automotive PBT rose 19% QoQ. Its equipment and manufacturing and engineering (M&E) segments also saw revenue growth, but the latter’s contribution fell by 23% QoQ mainly due to high costs from its lubricant sub- segment. Management remains confident on Toyota and Perodua sales reaching the targets of 93k and 314k, driven by its order backlogs of 49k and c.190k units.

• Within our expectations. 1Q23 core net profit of MYR123m is in line, at 27% of our FY23 forecast (and 31% of the Street's full-year projection). No dividend was declared, as expected.

• Results highlights. QoQ, 1Q23 earnings rose 17% despite the lack of revenue growth, mainly as the associate contribution rose by 61% because Perodua booked lower costs in 1Q23. Despite Toyota/Lexus' 16% QoQ decline in volume, we estimate that UMW Toyota's (UMWT) revenue only dipped by 1% QoQ – given its higher ASP and partially due to price hikes and product mix changes. UMWT's PBT softened by 6%. Its equipment revenue rose 10% QoQ due to higher deliveries of industrial equipment, and a 2.8ppt margin expansion helped PBT to expand by 44%. Despite a 16% QoQ increase in M&E revenue – partially driven by contributions from its aerospace business – the segment’s PBT fell by 23% QoQ. This is because the M&E segment’s PBT margin softened by 3.6ppt to 6.9%, mainly due to higher costs from its lubricant business. Its aerospace unit’s PBT margin was flat QoQ.

• Outlook. Management remains confident that Toyota and Perodua will be able to achieve their sales targets of 93k and 314k units for 2023, especially with backlogs at 49k and c.190k units as of May. We expect UMW’s automotive costs to remain stable and gradually trend down, along with easing raw material prices. While there are concerns of a slowdown in orders and deliveries, the current waiting periods of 3-7 months for Toyota and 2-12 months for Perodua indicate that demand continues to outpace supply. We believe that the strong demand is coming from down-trading and new model launches. We maintain our FY23-25 forecasts.

• Our unchanged MYR5 TP is based on 13x FY23F P/E, which is close to its 5-year mean of 14x. Our TP includes 0% ESG adjustments, as our ESG score remains unchanged at 3.0. Still BUY this stock, as we think UMW will continue to deliver strong earnings in the subsequent quarters, supported by its existing order backlogs. Its current price implies an attractive FY23F 9.5x P/E. Downside risks include weaker-than-expected orders, deliveries and margins, and a stronger-than-expected USD/MYR rate.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 29 May 2023