This article first appeared in The Edge Financial Daily on November 1, 2018

UMW Holdings Bhd
(Oct 31, RM4.75)
Maintain buy with target price (TP) of RM7.11 under review: The offer to buy out MBM Resources Bhd’s major shareholder was due to lapse yesterday. While it would have been an opportunity for MBM Resources’ minority shareholders to exit a value trap, unfortunately, we gather that Med-Bumikar has not responded to the offer. This also means UMW’s shareholding in Perodua will remain status quo at 38%. We also think UMW is unlikely to go through with its planned purchase of another 10% Perodua stake from Permodalan Nasional Bhd (PNB), if the deal to buy out MBM Resources falls through. The deal was merely icing to our previously, contrarian “buy”, and the sharp price retracement in the past one month more than reflects the deal falling through, we think. Similarly, MBM Resources’ share price has retraced sharply to just about RM2 in the past month.

Fundamentally, we expect the Toyota market share to hit a major inflection point in financial year 2019 forecast (FY19F) as the new Bukit Raja plant comes on-stream from the first quarter of FY19 (1QFY19). We forecast Toyota total industry volume (TIV) to rise 13% year-on-year (y-o-y) to 81,000 in FY19F, and market share to expand to close to 14% from 12% in FY18F. This is expected to be driven by the new Vios and, more importantly, the all-new Yaris (Honda Jazz competitor) which fills a major gap in UMW Toyota Motor Sdn Bhd’s model mix. Toyota TIV should rise further to about 90,000 in FY20F. UMW Toyota is targeting to regain pole position in the non-national segment over the midterm.  

Unlike the previous generation Rush, which was brought in completely built up, the latest version is locally assembled and contract manufactured by Perodua. UMW Toyota is targeting 3,000 to 4,000 annual sales volume, 4% to 5% of our FY19F Toyota TIV.  

Both Proton and Perodua will be launching their respective sport utility vehicles (SUVs) within the next two to eight months. These are important models that fill up gaps in their respective model mix. UMW is one of the major beneficiaries as it is the largest shareholder in Perodua with a 38% stake. Our FY19F 10% earnings growth for Perodua has yet to factor in the new SUV, which could drive a gap-up in market share. For now, we forecast conservative flattish market share in FY19F.  

Maintain “buy” on UMW but our TP of RM7.11 per share is under review. Key catalysts are: i) a deleveraged balance sheet post UMW Oil and Gas Corp Bhd demerger which allows room for acquisitive growth and possible resumption of dividend payouts; ii) reversal of prior years’ market share loss, structural cost reduction and pricing advantage from UMW Toyota’s energy efficient vehicle-focused strategy; iii) redevelopment of UMW’s Serendah land which will unlock the value of the asset — easily worth 40 sen per share on our estimates; and iv) a more than quadrupling of manufacturing and engineering division earnings once its aerospace division reaches full-scale production. — MIDF Research, Oct 31