This article first appeared in The Edge Financial Daily on February 7, 2019

UMW Holdings Bhd
(Feb 4, RM5.88)
Maintain hold and an unchanged sum-of-parts-based fair value of RM5.54: Toyota eyes an eventual return to the top spot in the non-national market, starting with an aggressive volume target this year. Two key Toyota models open the year, in anticipation of a softer first half: Vios starts deliveries this month, while the Yaris hatchback will see a launch in the second quarter (2Q).

UMW eyes a 14% sales growth with 40% of sales to come from the Vios. We project a lower growth of 8% as it will be an uphill battle for Toyota to build and sustain momentum. Toyota leaned heavily on 2018’s tax holiday, deriving 45% of total sales from the three-month window. In comparison, Honda maintained steady sales beyond the spike of that period.

The opening of the Bukit Raja plant compels UMW to pivot more heavily to volume-focused models with a goal to see break-even for the plant by next year. Bukit Raja will begin with an initial capacity of 50,000 units per year, while Shah Alam pares back to one shift (from a two-shift operation for 75,000 units a year). It hopes to maintain a utilisation rate of 85% for the latter by leaning on demand, especially for the Hilux.

We commend UMW’s move to operate the two plants at rates that are practical and to prevent a flooding of the market by way of excess inventory.

Beyond this, we are excited about the longer-term prospect of localising more models. In particular, a CKD version of the C-HR would be a strong catalyst. C-HR saw a fairly strong reception last year (accounting for 7% of domestic Toyota sales), given its premium pricing (RM150,000), and a CKD version would price it closer to the likes of the Honda HR-V and Mazda CX-5.

Certain players have bemoaned the months-long delay in the government’s decision for car prices. For UMW, this affected the Toyota rush and Perodua Aruz. The Toyota Rush was launched in October (with an indicative price of RM93,000) and deliveries have not started as the final price has not been determined, but UMW stressed that the impact on volume is minimal considering the sales target of only 300 units a month.

Meanwhile, the Perodua Aruz began deliveries last Friday after a fortnight-long delay due to similar concerns. The impact of the Aruz should be more visible from February and the model has a solid pipeline of at least three months.

We project a growth of 1.5% for Perodua this year (similar to the company’s target of 1.7%) anchored to strong reception for the Aruz and Myvi.

UMW emphasised that the M&E segment will return to the black this year and that the losses from aerospace have progressively declined with a steady ramp-up in its production rate. — AmInvestment Bank, Jan 4