UMW’s strategic exit from O&G sector on track
KUALA LUMPUR: Analysts are feeling comforted on UMW Holdings Bhd’s (UMW) prospects following a meeting with the group’s investor relations team.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), with the completion of the distribution and share capital reduction, UMW Oil & Gas Corporation Bhd (UMWOG) has been demerged from UMW group on July 11, 2017.
“Correspondingly, the strategic exit from unlisted O&G segment is expected to be completed by end-2018.
“With the exit, improvement in the group’s profitability is expected in the second half of 2017 (2H17),” Kenanga Research said.
The research arm added that the exit is expected to strengthen
Correspondingly, the strategic exit from unlisted O&G segment is expected to be completed by end-2018. Kenanga Research
the group’s balance sheet with reduced borrowings (estimated at RM2.9 billion), generating significantly lower net gearing. The estimated net gearing for financial year 2017 estimate (FY17E) was at 0.4-fold.
It noted that overall, the exit would reduce constraints on cash flow and enable the group to embark on various asset allocation strategies.
On UMW’s automotive segment, Kenanga Research highlighted that both Toyota and Lexus, along with Perodua are on track to meet the targeted total sales volume of 70,000 units and 202,000 units with the 1H17 volume currently at 49 per cent and 49 per cent, respectively.
Kenanga Research expected the group to introduce a few new variants, which are the face-lifted variants of Toyota existing models (Vios, Camry, Hilux, Fortuner), Lexus LC 500, Toyota CH-R, and replacement for Perodua Myvi by Perodua.
The research arm noted that for future growth, the new 670,000 square metre (sq m) Bukit Raja manufacturing plant is expected to be operational in early 2019, for production of both passengers as well as energy-efficient vehicles, with initial production capacity of 50,000 units annually based on one shift.
“Current plant at 75,000 units annually based on two shifts,” it said.
On to UMW’s manufacturing and engineering (M&E) segment, Kenanga Research noted that the group will re-focus on venturing into high-value manufacturing, starting with UMW Aerospace Sdn Bhd.
It further noted that the group will be the single source Tier-1 supplier for Rolls-Royce’s fan case with expected first delivery in October 2017 to the engine assembly facility in Seletar Aerospace Park, Singapore.
“The group is expected to manufacture the fan case in single-digit units for FY17, doubledigit units for FY18 and reaching full operation capacity in FY19 (maximum capacity at 250 units), under 25 plus five year contract with revenue in US dollar.
“The UMW Aerospace plant has only taken up 30 acres (from 861 acres) in Serendah Land, which open up the possibility for the group to monetise the vast land to create high-value manufacturing centralised activities,” the research arm said.
As for UMW’s equipment segment, Kenanga Research noted that the group will reposition their heavy equipment business towards more urbanised sectors such as construction with possibilities of growth through regional expansion.
The research arm foresaw a gradual increase in volume sales of industrial equipment capitalizing on mega projects (worth over RM550 billion), supported by agriculture and plantations industry, as well as expansion of equipment leasing business in which the group plans to further increase leasing revenue contribution to 50 per cent of total equipment revenue (currently, at 30 per cent).
Moving forward, Kenanga Research opined that the strategic exit from the O&G industry is expected to improve the group’s profitability with more solid balance sheet.
“Additionally, the anticipated new car models should excite consumers’ sentiment bringing in more sales volume to the group,” it said.
Nonetheless, Kenanga Research maintained its neutral stance on UMW in view of the single-digit growth in the group’s automotive segment sales volume pending the completion in its new Bukit Raja Plant and the gestation period for its Rolls-Royce plant.