UMW eases into recovery phase

0

KUCHING: UMW Holdings Bhd (UMW) continues to record improvements in its performance, buoyed by its strategies that are focused on overcoming the current challenges seen in the automotive industry.

In a recent report, the research arm of MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) pointed out that UMW’s financial year 2017 forecast (FY17F) earnings is backloaded and catalysts for improvements in its earnings are falling into place.

These catalsysts include a much stronger ringgit against the dollar, the launch of four new facelifts in September, the disposal of losses from UMW Oil and Gas Corporation Bhd (UMWOG) as well as the launch of the new MyVi in the fourth quarter of 2017 (4Q17).

Meanwhile, the gradual monetisation of UMW’s massive Serendah land which is expected to kickstart soon and progress in disposing the non-listed O&G units should also act as strong share price catalysts in the near-term, the research team pointed out.

Addressing forex volatility for autos, it noted that UMW has increased local content such as the Vios localisation rate increased from 51 per cent to 58 per cent for the current facelift model launched late FY16 – besides reducing forex exposure, UMW also benefits from lower effective excise duties .

It also pointed out that UMW is increasing CKD models from the current six CKD models (and six CBU models); most of this would materialise after the new Bukit Raja plant is up by FY19F. The research team noted, UMW is expanding contribution from after sales operations.

It added, UMW Toyota is also looking to rationalise its distribution network (its own branches) and focus on expanding dealerships (sales & service outlets operated by third parties).

“Other than UMW’s own measure to address forex volatility, we gather that the principal, Toyota Motor Corp (TMC) has also been providing incentives to UMW on a case by case basis since early FY17F,” it said.

The research team further pointed out that 3Q17 would see much lower USD rates.

“Average rates incurred for 1H17 was RM4.37 per dollar (1H16: RM4.24). UMW has locked up rates till September 17 at a much lower RM4.24 (three per cent improvement vs. 1H17) and this is expected to reduce further to RM4.21 in 4Q17.

“Spot rates currently stand at an even lower RM4.19. This should provide a big kicker to auto earnings in 2H17. Every one per cent change in US dollar impacts FY18F earnings by 4.7 per cent on our estimates,” it added.

MIDF Research also noted that CHR may come sooner than expected.

“The CHR is planned for launch in 1Q18. This is much earlier than previous indication of 3Q18 launch based on our earlier channel checks. The CHR will initially be brought in as a CBU. While registration of interest has been encouraging (more than 3,000 based on our ground checks), conversion into actual bookings is very dependent on pricing, which is expected to be finalised within the next month or so. A new CKD Camry is also on track for FY18F launch,” it explained.

Meanwhile, on the disposal of of UMW’s non-listed oil and gas (O&G) assets, MIDF Research noted that UMW has altogether 16 assets to exit within four different segments.

These assets are the drilling and exploration asset which is mainly in Oman, the OCTG and line pipe, fabrication, and trading and oilfield services.

Aside from that, MIDF Research noted that UMW is monetising on long held land assets which includes its Serendah land.

“This land is valued at circa RM2 per square feet (psf) in UMW’s books while estimated market rates of RM12 to RM16psf (depending on size of plots for sale) is six to eight times higher. Total value of UMW’s Serendah land is worth 40sen/share, easily six per cent of our SOP valuation.

“The two buyers are high value manufacturing companies (tie-ups with foreign partners) and is part of UMW’s larger plan to create an aerospace industry cluster at Serendah.

“The remaining land of 551 acres is slated for mixed development in the future with a strategic partner. Interestingly, we understand UMW is exploring methods to bring forward the value unlocking and monetisation of its vast Serendah landbank,” it said.

As for UMW’s equipment division, MIDF Research noted that UMW recently entered into a deal with Komatsu to allow the latter to take up 26 per cent stake in the Komatsu distribution business, allowing greater participation of the principal.

“This is expected to open up new markets (currently in Malaysia, Singapore, PNG and Myanmar), expand product range and client as well as see better financing assistance from the principal going forward. The deal is expected to be finalised by year end,” it opined.

It added, “The pre-operating loss from UMW’s new fan case plant was lower than our earlier estimate of RM14 million per quarter. Actual loss in 1H17 was RM25 million (or RM12.5 millionquarter). This loss is expected to reduce from 4Q17 as supplies will commence from October 2017 and revenue is generated. The unit is expected to achieve profits in FY19F. At full capacity, UMW is expected to supply 250 fan cases/annum – at this rate, we estimate revenue contribution of RM735m/annum or seven per cent of group revenue.”

Overall, it pegged a ‘buy’ call on the stock.