Investment Highlights

• Maintain BUY on UMW Holdings (UMWH) with a higher sum-of-parts (SOP) derived fair value of RM4.60/share (from RM4.00/share). We revise upwards 2022F–24F earnings by 11%–15% to reflect a higher contribution from the automotive (Exhibit 4) and manufacturing & engineering (M&E) divisions.

• UMW’s 1QFY22 results exceeded our and street’s expectations with a core net profit of RM108mil (-53% QoQ, +21% YoY), accounting for 34% of our previous FY22F earnings and 35% of consensus. The positive variance was mainly attributed to stronger-than-expected earnings contribution from the automotive and M&E divisions. The sequentially lower earnings were mainly due to the high base effect as 4QFY21 earnings included one-off RM140mil deferred tax assets related to an investment tax allowance.

• The automotive division is the quarter’s star performer, propelling the group’s profitability with a PBT of RM206mil (- 24% QoQ, +41% YoY), fuelled by higher sales volume from Toyota and Perodua. Based on Malaysian Automotive Association data, UMWH-related brands’ sales volume improved 12% YoY during the quarter (Exhibit 3).

• Demand for Toyota and Perodua cars remains robust, indicated by the combined backlogged orders of more than 100K units or 4 months of sales. We believe the demand is sustainable beyond the sales tax exemption period. UMW Toyota continues to see a healthy order rate even after it released updated prices for some of its models to include sales tax and price increases, starting 1 April. Separately, the introduction of the all-new Alza will provide an additional boost to Perodua’s sales in 2H2022.

• On the recent weakening of the MYR against the US dollar, UMWH is not ruling out the possibility of further price increases to partially offset the impact. The impact of the weaker MYR is expected to be first reflected in July/August.

• The equipment segment posted sequential improvement (PBT: +10% QoQ) as we transitioned into the endemic phase which drove demand for heavy and industrial equipment. The M&E division’s profitability improved due to lower operating costs. The aerospace unit is still loss-making in 1QFY22, but sales are expected to pick up starting 2QFY22 based on scheduled orders placed by Rolls-Royce.

• The stock currently trades at an attractive 2022F PE of 11x vs. its 4-year average of 14x and offers a decent dividend yield of 2%.

Source: AmInvest Research - 25 May 2022