New car launches seen to improve UMW sentiment
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