This article first appeared in The Edge Financial Daily on March 12, 2020

UMW Holdings Bhd
(March 11, RM2.71)
Maintain hold with a lower target price of RM3.05: We cut our financial year 2020 (FY20)-FY21 forecast earnings for UMW Holdings Bhd by 27-28% on expectations of lower contributions from its automotive (auto) and equipment segments. Although its aerospace component manufacturing business should deliver higher contributions, it will unlikely be sufficient to offset the drag from its two main earnings drivers.

However, UMW’s share price has fallen by 50% over the last 12 months. At 0.8 times price-book ratio, the stock is trading below -2 standard deviation of its 10-year mean. At these levels, we believe the negatives are priced in.

We believe UMW’s earnings will continue to be dragged by its auto and equipment segments. We expect the company’s auto sales to contract due to rising competition. The weak consumer sentiment and economic conditions may discourage consumer spending especially on big-ticket items such as vehicles. In addition, we expect UMW Toyota Motor Sdn Bhd’s pre-tax profit margin to be weighed by added depreciation cost, following the completion of its Bukit Raja plant in Shah Alam and a slowdown in manufacturing activities, to adversely affect its equipment division.

We expect Toyota’s auto sales to decline by 10% year-on-year. Given that the auto business contributes about 70% of its FY20 earnings, a sharper drop in auto sales will negatively impact its earnings. Significantly higher Toyota vehicle unit sales and better sales mix could boost earnings.

We gather that UMW may introduce four sports utility vehicle (SUV) models this year in the form of completely built-up units. We do not expect robust sales in the SUV sales because of increasing competition in the segment as mentioned above and potential cannibalisation among the models. It currently has four SUV models — Rush, CH-R, Fortuner and Harrier.

We expect flattish sales growth for Perusahaan Otomobil Kedua Sdn Bhd (Perodua) in line with its target for FY20. Sales continue to be supported by Myvi, Bezza, Axia and its sole SUV model Aruz which recorded its maiden sales contribution of 30,000 units in FY20, representing 13% of Perodua’s total sales.

Perodua has so far introduced the Bezza facelift in January this year, and the market is anticipating the company to launch another its SUV model (likely in the second half of FY20) coded as the D55L. The B-segment car is reported to be based on the 2020 Daihatsu Rocky that was launched in Japan in December last year, and built on Daihatsu’s new global architecture platform. — AllianceDBS Research, March 11