Aerospace division offers attractive returns to UMW
KUCHING: UMW Holdings Bhd’s ( UMW) aerospace division UMW Aerospace Sdn Bhd (UMWA) offers the group attractive returns while its venture into the aerospace sector is also expected to give the group a step up in its engineering capabilities.
Of note, UMWA had invested RM750 million ( land is leased from the parent company) into the aerospace plant and it has also secured a 25+ 5 year contract to supply fan cases to Rolls Royce’s (RR) Trent 1000/Trent 7000 engine final assembly facility in Seletar, Singapore.
In a report, the research arm of MIDF Amanah Investment Bank Bhd ( MIDF Research) noted that UMW typically sets a hurdle rate of two to three per cent above its weighted average cost of capital ( WACC) for its new ventures.
“Using this as a benchmark, we estimate UMWA’s 25-year RR contract to yield circa 12 per cent internal rate of return ( IRR) to derive an equity net present valuation of RM189 million, accounting for two per cent of our sum of parts value for UMW.
“While volumes under the RR contract are not guaranteed on paper, the massive aircraft order backlog which is eight to 10 years backlog (30 per cent coming from Asia) gives it a lot of visibility.
“Additionally, UMWA will be compensated for shortfalls in volumes such as manufacturing of other components for RR,” the research team highlighted.
Aside from that, it noted that UMWA is RR’s sole Tier-1 supplier in the region and also the only external supplier for the Trent 1000 and Trent 7000 fan case.
“Production volume is expected to gradually tilt towards the Asian operations going forward given that a large part of aircraft orders (circa 30 per cent) are coming from this region. This follows the setting up of RR’s Seletar operations in 2012 and is in-line with RR’s
Using this as a benchmark, we estimate UMWA’s 25-year RR contract to yield circa 12 per cent IRR to derive an equity net present valuation of RM189 million, accounting for two per cent of our sum of parts value for UMW. MIDF Research
strategic plans to build a supply chain in the region,” it added.
UMW’s entry into the aerospace sector gives it a step up in engineering capabilities, MIDF Research pointed out.
It noted that there are three possible growth areas for UMW and this includes further expansion of RR component manufacturing – the manufacturing processes that UMWA is currently undertaking accounts for 70 per cent of the entire fan case value; there is room to further expand this utilising UMWA’s current facilities, expansion of aerospace clientele to include other engine OEMs such as Safran- GE, as Tier 2 if not as Tier 1 vendor, and a vertical expansion into industries which require high precision manufacturing such as power plant turbines, medical equipments, advanced land transportation.
Meanwhile, MIDF Research noted that the group targets to double UMW’s M& E (manufacturing & engineering) division revenue (of RM646 million in FY17) over the next three to four years driven by UMWA’s fan case contract.
“Extrapolating the targeted revenue, we estimate circa US$ 600,000 to US$ 700,000 per fan case pricing.
“Benchmarked at a slight discount to SAM Engineering’s (nonrated) net margins of eight to 10 per cent, we estimate UMWA’s earnings at RM50 million to RM60 million per annum once it reaches full production capacity.
“To give a magnitude, this is 14 to 16 per cent of our FY18F net profit, but UMWA is only expected to hit this number in the mid-term,” the research team said.