This article first appeared in The Edge Financial Daily on May 24, 2018

UMW Holdings Bhd
(May 23, RM6.40)
Maintain fully valued with a higher target price (TP) of RM5.29: We have raised our earnings by 9%, 10% and 10% for financial year ending Dec 31, 2018 forecast (FY18F), FY19F and FY20F, respectively, to account for higher contribution from Perodua.

This has bumped up auto margins to 6.4%, 6.7% and 6.7% for FY18F, FY19F and FY20F from 5.8%, 6.1% and 6.1%, respectively, previously.

We believe auto margins should be able to improve as they benefit from the favourable exchange rate at RM3.96 against the US dollar currently versus RM4.30 to the US dollar in FY17.

Following our earnings upgrade, our revised sum-of-parts-based TP is RM5.29. Our proforma TP upon completion of the proposed acquisitions and mandatory takeover offer is RM5.72.

We maintain our “fully valued” call because valuation remains stretched with the stock trading at 18.4 times to 2018 price-earnings ratio.

As we factor in better numbers from Perodua and higher auto margins, our forecast inches up higher than consensus.

As FY18 is a transition year for UMW Holdings, it is too early to tell whether the earnings rebound from its core auto businesses can be sustained. This has led to a wide divergence in consensus estimates for FY18.

A potential catalyst is higher-than-expected auto sales. Exciting launches (Toyota CH-R)as well as improved customer sentiment and margins will boost auto sales and earnings.

Key risks to our view comprise slower auto sales and weaker margins. Significantly slower Toyota vehicle unit sales and higher manufacturing costs could depress earnings. — AllianceDBS Research, May 23