RHB Research maintain a ‘Buy’ call on UMW (UMWH MK) stock today based on Monday’s announcement that UMW Aerospace secured a new contract to manufacture Rolls- Royce’s aircraft engine rear case.
Spread over 15 years, the MYR1bn contract translates to MYR67m pa, or about 7% of FY22’s manufacturing and engineering (M&E) revenue.
The research house keep BUY and MYR5 TP for UMW at 31% upside and c.4% yield, saying they are positive on this development as it signals the recovery of UMW’s aerospace segment, but note that it has been well-guided by management and is already in our forecast and TP.
RHB highlighted that the 15-year MYR1bn aerospace contract from Rolls-Royce as announced by Minister of International Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz, during his visit to UMW’s aerospace plant in Serendah, Selangor stating that it was UMW’s second aerospace contract from Rolls-Royce. The first one was a MYR830m 25-plus-five-year contract from Rolls-Royce, awarded in Aug 2015.
The new contract allows UMW Aerospace to manufacture rear cases for Rolls-Royce’s Trent 1000 and Trent 7000 aircraft engines. The contract requires UMW to invest up to MYR65m to set up chemical milling and related processes, which we think is already in the company’s MYR115m FY23 capex for the M&E business.
RHB cited, in a statement today (April 11), to recap, in February, UMW’s management indicated that aerospace volumes were up 37% YoY, which translated to improvements in the plant’s utilisation rate. It rose from <40% in 2021 to an average of 50-60% in 2022. Management estimates the aerospace plant utilisation rate will be around 70-75% in 2023.
The MYR1bn spread over 15 years translates to about MYR67m pa. UMW does not separately disclose the aerospace segment’s P&L, as it is categorised under its M&E business.
In FY22, the business achieved a revenue of MYR984m on a PBT margin of 6.7%, as revenue steadily grew in 2H22 (Figure 3), partially driven by the aerospace segment, according to management.
RHB says that they maintain their estimates, as we have already factored in the recovery and growth of the aerospace segment in UMW’s M&E business. For FY23, we are forecasting M&E revenue of MYR1.1bn with a PBT margin of 10% (4Q22: 10.5%), largely driven by the recovery of the aerospace segment.
Currently, UMW is trading at an attractive 10x FY23F P/E while downside risks include weaker-than-expected orders and deliveries, softer-than-expected margins, and stronger-than-expected USD/MYR rate.
Overall ESG Score: 3.00 (out of 4) E: GOOD
UMW has taken efforts to monitor and improve its environmental standing, especially with energy consumption, carbon emissions, and water management. Its carbon footprint increased 2.36% in FY19.
