AFFIN Hwang Capital has maintained its earnings forecasts on UMW Holdings Bhd with a hold rating and 12-month price target of RM4.75, based on its sum of the parts (SOTP) valuation.
At a 15.7x 2020E PER (close to the post O&G de-merger average PER of 17x), UMW’s valuation looks fair. Key upside risks include higher-than-expected contribution from the aerospace segment, a strong rebound in Toyota sales, and a pick-up in construction and mining activities which would spur equipment sales, and the strengthening of the ringgit.
Key downside risks include intense competition in the automotive and equipment segments and higher-than-expected losses of oil & gas assets.
UMW’s automotive profit before tax dipped marginally to RM415 mil (-1% yoy) in the nine months ended Sept 30, 2019 due to a lower Toyota sales volume in 9M19 (-10% yoy to 48,000 units) that was cushioned by higher Perodua sales (+6% yoy to 178,800 units).
“UMW Toyota (UMWT) plans to field four brand-new sport utility vehicle (SUV) models in 2020. Management was tight-lipped about the model line-up / segment; we suspect the all-new Toyota RAV4 could be the first to be launched in 2020.
“UMWT has not firmed up the sales target for 2020 but aims to capture at least a 12% market share (11M19 market share: 11.3%). Industrial equipment is still steady but heavy equipment’s upside limited. The lacklustre demand/margins in the equipment business saw 9M19 PBT decline by 14% yoy to RM108 mil,” the research house adds.
It says prospects for the industrial sub-segment look healthy as UMW intends to further expand into the leasing business model, tap into the manufacturing and e-commerce sectors in Vietnam and increase its product offerings.
“We learnt that UMW’s heavy equipment sub-segment may also: 1) venture into the leasing business model, 2) implement an extended warranty programme and maintenance service contract, 3) have a wider product line-up, and 4) provide value-added services,” Affin Hwang says.
M&E segment likely to contribute positively in 2020
It adds that the mechanical and engineering (M&E) segment looks promising. Its 9M19 PBT more than doubled to RM31 mil compared with RM12 mil a year ago driven by better performance from the aerospace and auto-parts components.
“UMW Aerospace (UMWA) has delivered more than 150 units of Trent 1000 fan cases to Rolls-Royce (since the start of production in 2017) and we gather that the production of Trent 7000 fan cases is still scheduled to commence in 4Q20. We continue to expect UMWA to contribute positively in 2020 as it ramps up to 70%/90% utilisation rates (or 175 fans/225 cases) in 2020/2021,” the research house says.
Monetising long-held land assets
Affin Hwang says UMW management shared that close to 16.2ha of its Serendah land (out of 348.4ha) have been taken up so far.
“UMW is in active negotiations with potential buyers to relocate their business operations to Serendah. We gather that some of UMW’s operations in Shah Alam (equipment segment, UMW Advantech and Lube Group) will be relocated to Serendah within the next few years,” it adds. – Dec 24, 2019
