KUALA LUMPUR: Maybank Investment Bank Research has resumed coverage of UMW Holdings with a non-consensus buy rating and a new sum-of-parts based target price of RM6.65, which is 21% above the previous target of RM4.50.
“We believe that the worst is over for UMWH, with earnings growth to resume, underpinned by higher vehicle sales and margin expansion, the latter thanks to a much stronger ringgit,” it said on Friday.
Maybank Research projects a strong core earnings rebound in FY18 (+3.3 times on-year), continuing into FY19 (+44% on-year).
Post its demerger from UMW Oil and Gas, UMWH is refreshed with a strengthened balance sheet to move forward, it said.
The research house forecasts +7% on-year vehicle sales growth for UMWH in FY18, driven by new model launches - Toyota CH-R and Harrier in 1Q18, Camry in 2H18.
It also expects margins recovery for its automotive division from 1Q18 onwards in the form of lower imported component costs, on the back of a stronger ringgit against the US dollar.
Maybank Kim Eng forex research team forecasts the ringgit’s strength to sustain with an end-2018E forecast of 3.95 per US$. We project UMWH’s Auto pretax margin to recover to the 7%-8% level going forward, from 5%-6% in 2015/16.
Consensus concerns of lingering losses at UMWH’s non-core oil and gas operations may have understated the potential recovery at UMWH’s automotive division, which is the key contributor to the group, at 75%-80% of group revenue and almost all of its earnings.
“We note that UMWH has, in recent times, seen some progress in its plans to rationalise these non-core assets - two non-core subsidiaries were disposed in 2017 while operations for its onshore drilling rigs have ceased.
“With a strong earnings recovery in sight, we believe the timing is right to reposition in the stock. Price-to-earnings ratio valuations are undemanding based on our earnings growth trajectory, with valuations supported by sum-of-parts,” it said.
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