New car launches seen to im­prove UMW sen­ti­ment

The Star Malaysia - StarBiz - - Companies & Strategies - [email protected]­tar.com.my

UMW Hold­ings Bhd may con­tinue to pos­i­tively sur­prise in­vestors go­ing into 2019 as new car mod­els are pro­gres­sively launched from its sta­ble of Toy­ota cars.

Its re­cent quar­terly earn­ings in­di­cate that the worst is pos­si­bly over for the group, which had ex­pe­ri­enced a rather tur­bu­lent per­for­mance a year ago.

Toy­ota re­cently launched new mod­els un­der its pop­u­lar range such as the Vios, Camry and Rush with other up­dated mod­els such as the Corolla Altis be­ing ex­pected next year.

The launch of these new car mod­els by the Ja­panese car­maker will help bol­ster UMW’s earn­ings in the near fu­ture as peo­ple with older mod­els look to upgrade or to pur­chase up­dated de­signs.

UMW is the big­gest au­to­mo­tive player in the coun­try, be­ing the dis­trib­u­tor of Pero­dua, Toy­ota and Lexus cars in Malaysia and counts the au­to­mo­tive seg­ment as the big­gest con­trib­u­tor to its earn­ings.

While just prior to this, there was a keen fo­cus by the mar­ket on how the ride-shar­ing in­dus­try and im­proved pub­lic trans­porta­tion net­work had the po­ten­tial to dis­rupt the au­to­mo­tive in­dus­try as a whole, mar­ket ob­servers say that this con­cern seemed to have toned down a lit­tle of late.

Ob­servers point to two events in the year that had helped the case for car own­er­ship once again: the Grab-Uber merger in South­east Asia and the still lack of an ef­fi­cient and re­li­able last mile con­nec­tiv­ity in many res­i­den­tial ar­eas de­spite be­ing within a com­fort­able prox­im­ity to a light rail tran­sit (LRT) or mass rapid tran­sit (MRT) sta­tion.

Anec­do­tal ev­i­dence points to gen­er­ally higher ride fares and less coupon codes for con­sumers fol­low­ing the im­ple­men­ta­tion of the Grab-Uber merger that was an­nounced back on March 26.

Pos­si­bly in­di­cat­ing that the worst has passed for the con­glom­er­ate’s fi­nan­cial per­for­mance, UMW in its lat­est re­ported third quar­ter ended Sept 30 had posted a turn­around in its bot­tom­line po­si­tion to a net profit of RM128.13mil from a net loss of RM29.37mil in the same quar­ter a year ago.

The com­pany in its press state­ment says that the im­proved bot­tom­lines were due to im­prove­ments in all its busi­ness seg­ments: au­to­mo­tive (+42.6%), equip­ment (+10.8%) and man­u­fac­tur­ing & en­gi­neer­ing (+331.34%).

It notes that au­to­mo­tive sales in the quar­ter had im­proved sub­stan­tially dur­ing Goods and Ser­vices Tax (GST)-free pe­riod sup­ported with the launch of a new model dur­ing the quar­ter.

“Profit mar­gins also im­proved due to cost op­ti­mi­sa­tion ini­tia­tives and the strength­en­ing of the ring­git against the US dol­lar. Sub­se­quently, pre­tax profit in­creased sig­nif­i­cantly by 42.6% to RM151.3mil from RM106.1mil re­ported in the pre­vi­ous cor­re­spond­ing quar­ter,” UMW says.

Mov­ing for­ward, UMW ex­pects its au­to­mo­tive seg­ment to per­form sat­is­fac­to­rily due to strong in­ter­est be­ing re­ceived in its newly launched mod­els.

While its re­sults in both the re­cently passed quar­ter and the year-to-date pe­riod are im­pres­sive, note that UMW had just come out from a rather dif­fi­cult patch in its re­cent his­tory given the losses it in­curred from its in­vest­ments in the oil & gas (O&G) scene.

It has to­day al­ready ex­ited the O&G in­dus­try and says that it con­tin­ues to ex­e­cute strate­gies to fully re­store prof­itabil­ity and growth mo­men­tum.

UMW’s pres­i­dent and group chief ex­ec­u­tive of­fi­cer Badrul Feisal Ab­dul Rahim had told StarBizWeek ear­lier this year that the group is ex­pect­ing 2018 to be a prof­itable year.

In the pre­vi­ous year, the con­glom­er­ate had been weighed down by not only its O&G di­vi­sion but its au­to­mo­tive di­vi­sion as well which was pres­sured by the weak­en­ing ring­git.

UMW can to­day look for­ward to brighter days at least in the next one or two quar­ters even as the clouds on the hori­zon clears up.

UMW con­tin­ued to hold on to its gains de­spite tur­bu­lent mar­kets over­all and the stock has gained some 33% at the time of writ­ing from its re­cent trough of Oct 15.

It is trad­ing at a his­tor­i­cal price to earn­ings ra­tio (PER) of about 15.4 times and a for­ward 2018 PER of 16.5 times.

A ma­jor­ity or 76.5% of an­a­lysts polled by Bloomberg rated UMW a buy.

CGS-CIMB Se­cu­ri­ties which had re­cently up­graded the stock to an add (equiv­a­lent to a buy) and a tar­get price of RM6.36 says in its re­port that earn­ings prospects are im­prov­ing at the com­pany.

“The group is also plan­ning to ex­pand its line-up with the po­ten­tial in­tro­duc­tion of a new B-seg­ment model to com­pete with Honda. Fi­nally, UMW is also on track to com­mence pro­duc­tion at the newly com­pleted Bukit Raja plant in 2019. The new plant will help UMW raise its op­er­at­ing ef­fi­ciency through au­to­ma­tion and new ca­pac­ity to cater to the do­mes­tic mar­ket,” CGS-CIMB says.

The re­search house had raised UMW’s fi­nan­cial year 2018 (FY18) fore­casted earn­ings per share (EPS) by 20% but had cut FY19-20 fore­casted EPS by 5% as it ex­pects nar­rower mar­gins from a weak­en­ing ring­git and higher start-up costs for the new plant.

“We still ex­pect UMW to record an av­er­age of 11% net profit growth per an­num in FY19FY20. We upgrade UMW to add in view of stronger earn­ings prospects in the au­to­mo­tive di­vi­sion,” it says.

It notes that its higher tar­get price of RM6.36 is based on 14 times PER as it rolled over its val­u­a­tion to end-2019, and this val­u­a­tion is in line with its his­tor­i­cal mean.

The new plant will help UMW raise its op­er­at­ing ef­fi­ciency through au­to­ma­tion and new ca­pac­ity to cater to the do­mes­tic mar­ket. CGS-CIMB Se­cu­ri­ties

By DANIEL KHOO

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