UMW to ride on stronger ringgit

CEO: Conglomerate expects to be profitable this year

AFTER a few tough years, diversified government-linked conglomerate UMW Holdings Bhd appears to have emerged from the pits of a battle to regain profitability.

The fight was for it to continue keeping costs under control in a difficult operating environment that led to negative returns in the past.

The company had been mired in losses since the financial year 2015 ended Dec 31 (FY15) when its oil and gas (O&G) division suffered the brunt of the oil price crash that began in June 2014.

President and group chief executive officer (CEO) Badrul Feisal Abdul Rahim told StarBizWeek that it was no easy task to be at the helm of the diversified group during the loss-making years.

He took over the role from Datuk Syed Hisham Syed Wazir, who retired from the company in 2015.

Badrul Feisal was UMW’s chief operating officer prior to his appointment as CEO on Oct 1, 2015 – just as the company was starting to undergo one of its toughest times.

“I am not new in the company as I have been around since 2010. But during the days of making losses, it was very stressful waking up every morning, looking at the ringgit’s performance when it continued to drop and drop and drop,” he says in an interview at the company’s headquarters in Shah Alam.

“It’s like waking up and seeing the company lose money for no reason, or taking a salary cut every month,” he adds.

UMW was weighed down by its oil and gas division and this was compounded by the fact that its automotive division, the biggest contributor to the group, was pressured by the weakening ringgit.

“It was difficult because all car imports, the completely-built-up (CBU) Toyota from Japan, Thailand or Indonesia, the Lexus’ CBU and the importation of the completely-knocked-down components for the locally-assembled Toyota are from Japan and transacted in US dollars.

“The strengthening of the dollar caused us to lose money and we realised that we needed to be a more efficient organisation, ranging from hiring talent down to the production floors. Of course, the forex impact was huge but we could withstand the temporary setback,” he adds.

In 2015, the ringgit weakened by 23% and caused the company to lose some RM700mil in profit, according to Badrul Feisal.

“In 2016, we had to increase the selling price of Toyota vehicles by around 3% to 8%. And in the same year, the US dollar strengthened by 5% more and this affected the bottom line by RM300mil,” he says.

In FY15, UMW made a profit in its automotive division, but the segment’s bottom line shrank by 36.76% from the previous year to RM431.29mil, while the top line stayed flat at RM10.71bil.

The segment’s performance declined further in FY16 when the automotive division’s bottom line reduced to RM300.95mil on the back of a declining revenue of RM8.46bil.

He says the company will be benefit should the ringgit continue to sustain or build on its gains today.

“It has been definitely a good start to the year and the strengthening of the ringgit has brought smiles to me because it does help us in terms of managing our costs better,” he explains.

Plans for the automotive division are on track, as it expects further growth here even as it continues to diversify its income base from other sources.

The company is, after all, still the biggest automotive player in Malaysia with three brands under its umbrella – Lexus, Toyota and Perodua (see chart).

“I reckon that the automotive division is the space to watch out for this year. It will be more competitive. The new plant in Bukit Raja is on track, and come 2019, we will be in an even better position in terms of product lines and I believe we can actually be more competitive.

“For UMW Toyota, we have revamped the entire approach to marketing, sales and manufacturing. Internally, we call it ‘Project Reborn’ – to operate the business in optimal efficiencies using the Kaizen approach for customer service. This goes hand-in-hand with the new Bukit Raja plant,” he adds.

The new RM1.8bil plant will have a production capacity of 50,000 cars per year, churning out up to 100,000 cars at maximum capacity.

“Naturally, when the present plant started to age, you would have efficiencies declining, and so, we had to invest in new capital expenditures to ensure that ratios remained as they are. So, with the new plant that is equipped with new technologies and machinery, we believe we can actually be more competitive to offer car models with better costing and margins,” says Badrul Feisal.

The company’s plant in Shah Alam will eventually move its entire operations to Bukit Raja.

For Toyota, UMW will roll out the new Toyota Harrier and Toyota C-HR in the first quarter of this year.

“We intend to launch the C-HR in March, and hopefully, we will have more new models in the second half of the year. We expect to do better than the 70,000 Toyota units sold last year. For Lexus, we will launch the new Lexus LS and RX350L soon besides the new Lexus NX300.

“We hope to have more vehicles with energy-efficient status, especially with the new plant,” he adds.

He notes that the new Perodua Myvi has been performing well with 40,000-plus orders, with 21,000 units being delivered to date.

“This is a good achievement for Perodua, and hopefully, with the new models we can continue to outperform (the competition) in the automotive division,” he says.

Commenting on Proton appearing to step up its game in the local automotive scene, Badrul Feisal says: “I think it has always been a major competitor and will continue to be one that we have to reckon with. But we cannot be unduly worried about the Proton-Geely partnership and have to continue to be efficient. We just have to continue rolling out new models and let the market decide who is the best.”

Future star: UMW’s venture into the precision manufacturing industry includes making engine fan cases for Rolls-Royce. An engine fan case consists of 4,000 components and it is one of the largest parts of the engine.
Future star: UMW’s venture into the precision manufacturing industry includes making engine fan cases for Rolls-Royce. An engine fan case consists of 4,000 components and it is one of the largest parts of the engine. 

Turnaround from FY18

The company’s shares, which saw gains of about 36.54% in January, continue to hold on to most of their year-to-date gains.

In the period, UMW’s shares are higher by about 30% with strong participation from the market.

The company will announce its FY17 full-year and fourth-quarter results soon.

“We incurred losses in FY17 due to the impairments. The reason we did this is to signal our intention to exit the O&G business. While we have achieved the set profit target for all core businesses in the automotive, manufacturing and engineering (M&E), and equipment segments, it is still a challenge for us to completely divest the remaining O&G businesses.

“These are the remaining O&G segments under UMW Holdings after we demerged the listed UMW Oil & Gas Corp Bhd. We have said before that we would dispose of all in FY17, and this year, while we have successfully disposed of a number of companies, we still have quite a lot of work to do in terms of disposing of the remaining assets,” he adds.

Despite that, Badrul Feisal points out that FY18 will be an inflection point where UMW will see a “meaningful turnaround”.

He says this year will see continued growth in the automotive segment with better car sales and margin improvement from the stronger ringgit, improving demand for heavy and industrial equipment and a strong possibility for the M&E segment returning to profitability.

“Startup losses from the aerospace business will begin to taper off starting from FY18. I am hopeful that this will be a year of continued growth with better earnings and revenue. We hope to move beyond the legacy issues and see the legacies being settled,” he says.

Badrul Feisal notes that the turnaround will be seen from the first quarter of FY18, and there is also a possibility of writebacks after the numerous writedowns.

“Even without the possible writebacks, we will see an improved operational performance. I think the worst is behind us,” he says.

While on the surface, it appears that the fundamental picture is still bleak, given its undefined price-to-earnings ratio, UMW’s share price has moved up anticipating an improvement in its financials.

Analysts are, however, more cautious, with all except one research house still rating the stock a “hold” or “sell”.

According to data on Bloomberg, the contrarion “buy” call comes from Maybank Kim Eng with a target price of RM6.65, which has already been hit.

CIMB Research highlighted in its note that was published on Nov 29, 2017 that the automotive segment was expected to drive UMW’s earnings growth in the fourth quarter boosted by year-end promotions.

It, however, noted that the exposure to the unlisted O&G division continued to remain a drag on its earnings.

“The unlisted O&G division posted wider pre-tax losses of RM121mil in the nine months of FY17 against RM117mil in the previous year due to lower demand for drilling activities. In spite of the wider loss, we see a minimal impact on the group’s cashflow, given that the majority of losses were related to a one-off RM55mil write-off for the cessation of drilling operations in Oman,” it said.

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