• Still NEUTRAL and MYR3.80 TP, 2% upside. Yesterday, we attended a site visit to UMW’s aerospace plant. Prospects for the segment seem promising, especially with the recovery of the aerospace industry. In the near term, the segment’s profit growth should come from rising volume and improving margin due to economies of scale. From FY25F, its profit could see a further boost from the manufacturing of rear cases. Despite uncertain automotive prospects in FY24F, we keep to our call as the stock is fairly valued, and still yields c.4%.

• Aerospace segment continues to recover. In FY22, UMW’s aerospace segment continued to see a turnaround. With an average utilisation rate of 50-60% (FY21: c.40%), its revenue rose 53% YoY to MYR226m (FY21: MYR148m), delivering a smaller LBT of MYR9m (FY21 LBT: MYR34m). With the increase in volume and utilisation rate, 4Q22 and 1Q23 are once again profitable. However, 1Q23’s aerospace margin was flat QoQ, mainly as 4Q22 saw some FX gains. Despite some lingering supply chain issues, the impact to production and deliveries is manageable.

• New rear case contract should lift margin. In April, it was announced that UMW Aerospace will also manufacture rear cases for Rolls-Royce’s Trent 1000 and Trent 7000 aircraft engines. The rear case is part of the fan cases that UMW has been delivering to Rolls-Royce. Previously, UMW had been purchasing the rear cases from a North American supplier to assemble into the fan cases before shipping to Rolls-Royce UK. UMW's manufacturing of the rear case (to be commercialised in FY25) should translate into cost savings and incremental margin improvement. Coupled with continued volume growth, the segment’s profit should rise further.

• UMW Aerospace still has room to grow. Despite the segment's promising near-term prospects, it still has room to grow based on its existing and expanding capacity. Its management is always looking out for potential business opportunities, especially given the recovery in the aerospace industry. With its newly set up, self-developed, and highly proprietary chemical milling plant, certain original equipment manufacturers are expressing interest in UMW Aerospace's capabilities, which we think could potentially translate into new contracts in the coming years.

• Maintaining our earnings estimates, TP, and call. Post site visit, we maintain our estimates (which has accounted for the aforementioned prospects) and TP of MYR3.80 based on 11x FY24F P/E, or -0.5SD from its 5-year mean of 13x. Our TP also has 0% ESG adjustments. We recently turned less bullish on UMW due to its uncertain FY24 automotive prospects, given our expectations of a softer 2024 TIV. Nevertheless, we think the stock is still worth holding for its 4% yield. It is also trading at a fair 11x FY24F P/E. 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 - 15 Jun 2023