UMW unit to contribute positively from 2019

UMW Aerospace expected to remain loss-making this year

PETALING JAYA: UMW Holdings Bhd expects its aerospace business to start contributing positively to earnings from 2019, driven by higher shipment volume growth.

In a research report, CIMB Research said UMW expects subsidiary UMW Aerospace Sdn Bhd (UMWA) to remain loss-making in 2018, mainly due to plant start-up costs and deprecation expenses.

The research house, however, said UMW is optimistic about UMWA’s prospects in 2019.

“We expect UMWA to be a key growth driver for the manufacturing and engineering (M&E) division, which now accounts for about 5% to 6% of the group’s total revenue and net profit.

“The group expects to see double-digit revenue and net profit con- tribution from M&E by 2021,” said CIMB Research in a report yesterday.

The research house said it is raising UMW’s 2018 to 2019 earnings per share by 14% to 24%, reflecting the strengthening of the ringgit with a lower average of RM4.05 for 2018 to 2019.

“The strengthening of the ringgit will help to reduce the completely-knocked-down kit and completely built-up unit costs for Toyota and Lexus models.”

Following its earnings revision, CIMB Research said it is maintaining its ‘hold’ rating on the stock, with a higher target price of RM6.40.

“Key upside risks are accelerated disposal of unlisted oil and gas (O&G) assets and strengthening of the ringgit versus the dollar, while key downside risks are delayed disposal of unlisted O&G assets and depreciation of the ringgit against the dollar.”

Separately, CIMB Research highlighted that UMW had signed a 25-year supply contract in August 2015 to manufacture and assemble Rolls-Royce’s engine fan cases.

The contract, which comes with a five-year extension option, will see UMW specifically assembling RollsRoyce Trent 1000 and Trent 7000 engine fan cases.

“The Trent 1000 engine is used in the Boeing 787 Dreamliner, while Trent 7000 is exclusively used in the Airbus A330neo model.

“We understand that the Rolls Royce Trent engine fan cases are currently produced at Rolls- Royce’s facilities in the United Kingdom and two external suppliers – one in Italy and the other by UMWA.

“After securing the contract, UMW invested RM750mil to build the new 200,000-square-feet production facility in Serendah, Selangor,” added CIMB Research.

“Construction started in December 2015 and the facility was completed within a year. UMWA began shipment of its first fan case in November 2017 and it shipped six unit fan cases in 2017.

“The group is targeting to increase production volume to 80 units in 2018, 160 units in 2019 and 250 units in 2020.

UMWA still has production floor area to add another 70 units by utilising its pre-production plant.”