• Downgrade to NEUTRAL from Buy, TP drops to MYR3.80 from MYR5, 2% downside. As the outlook for FY23 is increasingly priced in, we think that investors will gradually look forward to FY24, where we think overall automotive sales will continue to soften. We now value UMW at 11x FY24F P/E (from 13x FY23F P/E), to reflect: i) Softer sentiment for auto stocks; and ii) lower earnings – both due to potentially lower car sales. We are now NEUTRAL on UMW, but we think it is still worth holding for the 4% yield, and as it is fairly priced at 11x FY24F.

• 1Q23 results were commendable, 2023 outlook is promising. UMW's 1Q23 results met our estimate and exceeded the Street full-year forecast at 31%. At its post-earnings briefing, management sounded upbeat about 2023, mainly backed by Toyota and Perodua’s current order backlogs of 49k and 190k units. It also remains confident that Toyota and Perodua will hit their sales targets of 93k and 314k units in 2023. This mirrors our positive 2023 outlook for UMW, as we think the order backlog provides earnings visibility for the year. Although we highlight that the USD/MYR rate has risen by c.5% in 2Q23, we estimate that a 10% increase in USD/MYR rate would only reduce group earnings by MYR0.97m, due to the natural hedging from other segments. The YTD average of the USD/MYR rate of 4.43 is also within our FY23F rate of 4.5.

• However, a strong 2023 is largely priced in. In our view, there is a general consensus in the market that 2023 will be a strong year, especially for Toyota and Perodua. Currently, we believe investors are keeping a close eye on a potential slowdown in orders, as it can be an early indicator of a decline in earnings.

• Car sales to normalise in 2024. We expect Toyota’s and Perodua’s sales volumes to soften by 10% to 90k units (for the former), and by 22% to 250k units (for the latter) in 2024. There are nascent signs of a slowdown in orders. While Toyota's order backlog remains largely unchanged at 49k units (end-February: 50k units), Perodua's order backlog has softened to 190k units (end-February: 220k units). Without any fresh catalysts to boost new orders, we think these may gradually soften throughout 2023 – which will translate to softer 2024 deliveries.

• We maintain our FY23-25 estimates, as we have already factored in the gradually softening car sales. Our TP drops to MYR3.80, which is now based on 11x FY24F P/E (previously 13x FY23F), at -0.5SD from its 5-year mean of 13x, given the softening prospects. We also roll forward our valuation to reflect FY24F EPS, as we think that the market will gradually price in UMW’s FY24F earnings. Our TP has 0% ESG adjustments, based on an unchanged ESG score of 3.0.

• Downgrade to NEUTRAL from Buy. Although we are less bullish on UMW, we think the stock still worth holding due to its 4% yield. At the current price, UMW trades at 11x FY24F P/E – which is fair and reflects its balanced risk-reward ratio. Downside risks include softer-than-expected orders and deliveries, worse-than-expected FX movements, and higher-than-expected costs. The opposite represents upside risks.

Source: RHB Research - 2 Jun 2023