UMW growth seen relying on Toyota, Perodua sales

This article first appeared in The Edge Financial Daily, on July 18, 2019.
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UMW Holdings Bhd
(July 17, RM5.39)
Maintain hold with a higher fair value (FV) of RM5.89:
We maintain our “hold” recommendation on UMW Holdings Bhd with a marginally higher FV of RM5.89 (from RM5.88) based on sum-of-parts valuation with a financial year 2020 forecast (FY20F) price-earnings ratio of 10 times for the automotive segment.

UMW recently announced that it had entered into a sale and purchase agreement with MCE Industries for the disposal of 8.25 acres (3.34ha) of land in UMW’s High Value Manufacturing (HVM) Park.

MCE Industries is a wholly-owned subsidiary of MCE Holdings Bhd, a public listed company that designs, manufactures and supplies automotive electronics and mechatronics parts. It is also one of Malaysia’s leading original equipment manufacturer suppliers in the automotive industry.

The land was sold for RM14.4 million cash (RM40 per sq ft), which we believe to be a good deal for UMW. The initial book value of the land was relatively cheap at RM2 per sq ft, translating into about RM720,000. We estimate the gain on disposal to be RM13.7 million. The group said proceeds from the disposal will be used for future working capital. It also guided that the disposal will be completed with the sale proceeds recognised in the third quarter of FY19.

We are positive on this as it shows that a growing number of advanced manufacturing companies are setting up shop in UMW’s HVM Park, which currently houses UMW Aerospace and the T7 Kilgour metal treatment plant. This is in line with the group’s long-term goal to develop the Serendah land into a high-value manufacturing park. So far, about 40 acres of the land have been taken up — 24 acres by UMW Aerospace, seven acres by T7 Kilgour and 8.25 acres sold to MCE Industries.

UMW has also announced that its subsidiary UMW Advantech Sdn Bhd had signed a technology licence and assistance agreement with Aisin Industry Co Ltd to manufacture and supply carbon canisters for the Perodua Aruz from December 2019. This will contribute to Perusahaan Otomobil Kedua Sdn Bhd’s (Perodua) strategic initiative to increase the localisation of the Aruz, which has achieved over 90%.

We believe that this partnership could help the Aruz and other Perodua models to be more price-competitive, which will be key in maintaining a healthy and robust sales volume. We deem this to be positive as Perodua is a 38%-associate of UMW. We believe growth this year will rely heavily on a higher sales volume for Toyota and continued support from Perodua’s strong sales of the Myvi and Aruz. Also, growth will be underpinned by a continued improvement in the manufacturing and engineering segment as the aerospace unit gains production momentum with an eye to break even in the second half of FY20. — AmInvestment Bank, July 17