This article first appeared in The Edge Financial Daily on November 1, 2019

UMW Holdings Bhd
(Oct 31, RM4.43)
Upgrade to outperform with an unchanged target price (TP) of RM5.45: We expect UMW Holdings Bhd’s third quarter of financial year 2019 (3QFY19) core net profit (CNP) to come in between RM85 million and RM90 million, (-11% to -6% quarter-on-quarter [q-o-q] and -38% to -35% year-on-year [y-o-y]) which is due to be released by end-November. We attributed this to weaker UMW Toyota Motor’s sales of 19,908 units (-9% q-o-q, -25% y-o-y), with a lower nine-month financial year 2019 (9MFY19) total industry volume (TIV) market share of 11% (9MFY18: 12%). Y-o-y unit sales were lower, due to a higher base from the historic tax holiday, while q-o-q was weaker from the spate of public holidays (Hari Raya Aidiladha, Awal Muharram, Agong’s birthday, and Malaysia Day). 3QFY19 sales largely (70% of total sales) came from the combination of the all-new Toyota Vios (launched on Jan 24, 2019), all-New Toyota Yaris (launched on April 19, 2019) and supported by Toyota Hilux. Overall, we expect its 9MFY19 CNP to come in the range of RM274.3 million to RM279.4 million (-15% to -14% y-o-y), well within our expectations of 73% to 75%, but below consensus expectations of 69% to 70% of full-year estimates. Note that, for 9MFY19, UMW Toyota Motor sales were at 58,885 units (-15% y-o-y).

Overall, the group CNP is backed by the 38%-owned associate, Perusahaan Otomobil Kedua Sdn Bhd (Perodua) which recorded 3QFY19 sales of 56,972 units (-7% q-o-q, +11% y-o-y), bringing in 9MFY19 sales to 178,668 units (+6% y-o-y), with a higher TIV market share of 40% (9MFY18: 37%), driven by the all-new Perodua Myvi and the all-new Perodua Aruz (25,000 bookings, 22,200 delivered). Our price assumption for 3QFY19 CNP is based on the vehicles’ average selling price for the past three quarters. We expect better margins from the cost-savings derived from the higher localisation rate in the all-new Vios and Yaris (at 80%, compared to previous generations of 50%) as well as less discount promotions for the outgoing models to cushion the new Bukit Raja plant’s depreciation cost (estimated at RM60 million to RM70 million per year, for 30 years) which started in 1QFY19.

UMW Toyota Motor targeted higher 2019 sales at 75,000 units (+15%) for Toyota and Lexus models. It has launched the all-new Toyota Vios (RM78,000 - RM88,000) on Jan 24, 2019, the all-new Toyota Yaris (RM72,000 - RM84,000) on April 19, 2019, the A90 Toyota GR Supra (RM568,000) on Sept 20, 2019 and the all-new Toyota Corolla Altis (RM129,000 - RM137,000) on Oct 9, 2019. Elsewhere, 38%-owned Perodua is targeting higher 2019 sales of 235,000 units (+3.4%), from the all-new Myvi and Aruz. Furthermore, Perodua is expected to benefit from the third national car project as an original equipment manufacturer and with Daihatsu as the technology partner. In its equipment division, the group will continue to leverage on its partners (Komatsu and Tico)’s strengths, while UMW Aerospace Sdn Bhd is expected to reach break-even level by FY20.

We upgrade to “outperform”, with an unchanged TP of RM5.45 based on 14 times estimated FY20 earnings per share (at -1 standard deviation of its five-year historical mean price-earnings ratio). We upgrade it to “outperform” (from “market perform”) on the back of the recent share price weakness which offers investors an attractive entry opportunity. We believe that the current price level has largely discounted the negatives. We like the stock for its: i) stream of all-new models (especially Vios and Yaris) with better margins; and ii) its deep-value stake in 38%-owned Perodua. Risks to our call include: i) lower-than-expected car sales volume; and ii) unfavourable foreign exchange. — Kenanga Research, Oct 31