This article first appeared in The Edge Financial Daily on January 30, 2019

UMW Holdings Bhd
(Jan 29, RM5.90)
Downgroade to hold with a lower target price (TP) of RM6.10: We hosted a meeting between UMW Holdings Bhd and 20 analysts and fund managers last Friday. During the meeting, the group highlighted that its new vehicle sales in fourth quarter of 2018 (4Q18) were partially impacted by the run-out of Vios and Camry models, delay in getting approval for the new models’ pricing from the authorities, and higher sales captured during tax holiday period between June and August 2018. Toyota and Lexus sales fell 39% quarter-on-quarter (q-o-q) in 4Q18 while Perodua posted a stronger sales recovery (+15.5% q-o-q), partly driven by improving Myvi supply.

In addition, we are encouraged to learn that UMW’s latest production facility in Bukit Raja started delivery of the new Toyota Vios in early January. The new plant has a total production capacity of 50,000 units per annum on a single-shift operation. We believe the Bukit Raja plant will allow UMW to produce more exciting new completely knocked down models at competitive prices relative to their peers. Meanwhile, we expect the group to reduce Shah Alam plant’s production capacity to a single shift to 35,000 units per annum.

UMW expects to deliver 75,000 unit sales volume in 2019 (+12.7% year-on-year [y-o-y]), driven by the launch of new models, such as the new Vios, Hilux, C-HR and Rush, and the introduction of a new B-segment model, Yaris. Meanwhile, we expect another strong year for Perodua in 2019, driven by the new Aruz SUV and Myvi. Aruz received 5,700 bookings in the first three weeks of 2019. Overall, Perodua targets 231,000 unit sales in 2019 (+2% y-o-y).

In spite of its attractive growth prospects in automotive, UMW will be impacted by depreciation expenses from its Bukit Raja plant and higher coupon payments related to its RM1.1 billion perpetual sukuk issued in April 2018. The group will incur RM70 million annual coupon payments for the sukuk. Hence, we cut our financial year 2019 (FY19)-FY20 earnings per share forecasts by 4%-5%.

UMW’s strong earnings prospect is already reflected in its share price, which has risen 42% since October, its lowest in 2018. Following our earnings revisions, we downgrade the stock to “hold”, with a lower TP of RM6.10. — CGSCIMB, Jan 29