CIMB Research retains Reduce for UMW due to potential delays

UMW Land president Dr Wafi Nazrin Abdul Hamid (pic) said this was a 30-year contract to produce fan-casing for Rolls Royce engines.

KUALA LUMPUR: CIMB Equities Research is maintaining its Reduce rating for UMW Holdings Bhd with a lower RM4.83 target price, based on 13 times CY18 price-to-earnings (P/E) after the shares went ex.

It said on Tuesday it sees downside risks to UMW’s share price due to potential delays in the non-listed oil & gas (O&G) assets disposal, deteriorating earnings from the auto division due to currency volatility and higher-than-expected start-up costs from its aerospace division. 

“Key upside risks are accelerated disposal of non-listed oil and gas assets, and stronger earnings contribution from automotive. Switch to Bermaz for exposure in the auto sector,” it said.

On Monday, UMW’s share price went ex following the distribution of 1.2048 billion shares in UMW Oil & Gas (UMW-OG) to UMWH’s shareholders. 

The share distribution is on the basis of 1.0312 shares in UMW-OG for each existing share in UMW. 

“Post demerger, our target price for UMWH falls from RM5.30 to RM4.83 (based on 13 times CY18 P/E), after stripping out our previous valuation of 47 sen per share in UMW-OG,” it said. 

On Jan 17, UMW announced the group was exiting the oil and gas sector with the disposal of its entire stake in the listed UMW-OG and non-listed oil & gas assets. 

CIMB Research pointed out the non-listed oil & gas assets remain loss-making; however, they posted a narrower RM10.7mil loss after tax in 1Q17 vs a RM34mil loss after tax in 1Q16. 

UMW is constructing a new RM1.8bn automotive plant in Bukit Raja, Selangor with a production capacity of 50,000 units/year. 

This will raise its production capacity by 75%. The group expects the plant to be completed by end-2018 and production to begin in 2019. 

“We do not expect significant earnings contributions for the next 24 months 
“We expect to see intense competition in the automotive segment as dealers continue to offers significant discounts in the near term to drive down inventory levels. 

“Also, we see significant margin erosion from currency volatility which has led to higher import costs for complete built-up (CBU) models and CKD kit components,” it said. 

CIMB Research said UMW is moving into the high-value manufacturing business with its engine fan case project.

 It was awarded a 25-year contract from Rolls-Royce to manufacture fan cases for Trent 1000 and 7000 engines, which are used in Boeing 787 and Airbus A330neo. 

“Although we are excited about the new venture, we do not expect significant earnings contributions from the new division until 2019F when it starts to ramp up production. 

“We see limited upside to UMWH’s share price given that the stock is up 38% YTD as the potential earnings recovery from the oil & gas assets disposal is reflected in its share price. 

“Also, we project a 111% EPS growth in FY18F mainly from narrowing losses from the oil & gas division. The stock is trading at 16.4x CY18 P/E, which is higher than its five-year (2009-2014) historical mean of 13 times, prior to its loss-making 2015,” it said.