This article first appeared in The Edge Financial Daily, on May 19, 2016.

UMW Holdings Bhd
(May 18, RM5.62)
Maintain hold with an unchanged fair value (FV) of RM6.36: The Nikkei Asian Review reported that UMW Toyota Motor Sdn Bhd will build a new production plant devoted to building small cars at an initial capacity of 50,000 per year, at the cost of ¥30 billion (RM1.1 billion).

The publication added that the plant is set to commence in 2018 and will progressively raise capacity to 100,000 per year. However, UMW Holdings Bhd said in an official statement yesterday that it had not made any decision on the matter.

UMW would need to fork out ¥15.3 billion given its 51% share of UMW Toyota Motor. The remaining stake is held by Toyota Motor Corp (39%) and Toyota Tsusho Corp (10%), the trading arm of the Toyota group. This would be negative for UMW given its already strained finances and the poor outlook for Toyota sales in Malaysia for the immediate term. UMW’s net gearing last stood at 51.5% at the end of 2015 (from 12.4% in 2014) as borrowings shot up to RM6.02 billion (from RM4.2 billion in 2014) due to financing taken for the delivery of two rigs under UMW Oil& Gas Corp Bhd, a 55.72% unit. It was in a net debt position of RM3.2 billion.

Furthermore, it will be a soft year for UMW’s earnings as its two major segments — automotive and oil and gas — are still struggling to recover, after seeing net profit fall by 37% and 250% year-on-year (y-o-y) in financial year ending Dec 31, 2015 (FY15) respectively.

On sales, Toyota’s total industry volume fell 37.1% y-o-y in the first quarter of FY16 (1QFY16) on price hikes introduced in January and the enlarged base of pre-goods and services tax (GST) sales in 1QFY15. 1QFY16 sales only met 12% of UMW’s target of 85,000 units for Toyota this year.

On the plus side, a stronger pivot into small cars could be positive given the strong demand for cheaper and smaller cars in Malaysia and developing countries in Southeast Asia.

Within the local Toyota line, the Vios, Rush and Avanza are considered B-segment cars. Vios (completely knocked down [CKD]) is Toyota’s bestseller and took up 36% of its FY15 sales. Rush and Avanza are still imported.

Local CKDs for Toyota are built at the existing Shah Alam plant by Assembly Services Sdn Bhd (ASSB), a wholly-owned unit of UMW Toyota Motor. The plant has an annual capacity of 75,700 units per year (utilisation: about 80%), and builds six CKD models: Vios, Camry; Hilux, Innova, Fortuner and Hiace. All models are made for the Malaysian market, but the Hiace is also exported to Thailand.  

We maintain our numbers and FV pending the company’s 1QFY16 results announcement next Tuesday, and await confirmation on the capital expenditure spending on the plant, details on production and the timeline for execution.— AmInvestment Bank Bhd, May 18