• Still NEUTRAL, with TP of MYR5 and 4% upside. UMW’s 2Q23 earnings came within our expectations, with core net profit easing mainly due to lower associate contributions caused by Perodua’s higher costs. Toyota and Perodua's order backlogs continue to soften, supporting our thesis that 2024 will likely see softening car sales. We remain NEUTRAL as we lack visibility on 2024’s car sales, and as Sime Darby’s (SIME MK, BUY, TP: MYR2.50) offer price of MYR5 to acquire UMW only has 4% upside.

• Within our expectations. 2Q23 core net profit of MYR115m brought 1H23 core net profit to MYR238m, making up 53% of our full-year estimate – within our expectations – and 57% of Street's estimate. Note that the reported PAT of MYR304m includes a one-off gain on disposal of land in Serendah. The sale fetched MYR305m revenue, MYR218m PBT, and MYR177m PATAMI for UMW. As expected, no dividend was declared.

• Results highlights. 2Q23 saw softer car sales due to a seasonally shorter quarter and scheduled plant shutdowns. Despite Perodua’s sales volume only falling 16%, UMW’s associate contribution fell 37% QoQ as Perodua faced higher labour costs (bonuses), local parts prices, and depreciation expenses from new models. On the other hand, Toyota’s revenue fell 6% but we estimate its margin to have expanded. Management attributes this to lower derivative losses QoQ. Within the M&E segment, we believe higher aerospace contributions negated lower car parts earnings.

• Outlook. Toyota's order backlog stands at 40k units (50k at end-Feb and 52k at end-May), while Perodua's is at 155k units (220k at end-Feb and 190k at end-May). The softening of the order backlogs is largely expected, given that: i) the numbers were boosted by new car launches earlier in the year, and ii) lack of new catalysts to sustain such high levels of order backlog. Management is confident that Toyota and Perodua will achieve the 93k and 314k sales volume targets this year. While 2023 is set to be another record-breaking year (2023F TIV: 725k), the softening order backlog suggests 2024 could see softening car sales.

• SIME's proposed acquisition of UMW is currently pending shareholders' approval. UMW's management said it has yet to engage with its principals on the proposal and would only do so after shareholders approve the deal.

• We maintain our FY23-FY25 forecasts, as earnings came in-line.

• We maintain our NEUTRAL call and MYR5 TP, based on 14.4x P/E on FY24F EPS, which matches SIME's offer price to acquire UMW. Our TP includes 0% ESG adjustments. We are NEUTRAL on UMW as the FY24 outlook remains uncertain, and SIME's offer price has less than 10% upside from the current share price. Key risks include SIME's proposed acquisition falling through, and lower-than-expected orders, deliveries, and margins.

Source: RHB Securities Research - 30 Aug 2023