Another huge contract in the UMW 4588 UMW HOLDINGS BERHAD’s bag but could be dragged by start-up losses

 Another huge contract in the  UMW 4588 UMW HOLDINGS BERHAD’s bag but could be dragged by start-up losses

 


UMW Holdings Bhd is having a good ride in the past 6 months, increasing 25.6% to RM3.83 on April 11 giving it a market cap of RM4.5 billion.


It is even more impressive that the counter had surged to the current level from a 52-week low of RM2.77 although it is still trading below its high of RM4.04.


A sure booster to its bottomline is its success in securing another contract from aircraft engine maker Rolls-Royce, worth RM1 billion over 15 years.


Based on the contract valued of RM1 billion, this works out to be around RM67 million revenue per year for UMW.


The latest contract from Rolls-Royces is for the supply of rear cases while the first contract worth some RM830 million was for fan cases.


Its first contract in 2015 was for 25+5 years to manufacture and assemble fan cases for Trent 1000 and Trent 7000 aircraft engines.


Previously, Kenanga did not attach any value to its aerospace segment as it was loss making solely from the maiden contract win from Rolls-Royce.


But this second contract changes things for UMW as this win validates the company’s credibility and operational efficiency.


As such, it makes sense now for Kenanga to attach a value to UMW’s aerospace segment after bagging the second Rolls-Royce contract.


In fact, the research house has revised its valuation method to Sum-of Parts (SOP) from PE, valuing the aerospace segment using Price-to-Book valuation.


This led to anincrease Kenanga’s TP for UMW by 2% to RM4.80 from RM4.70.


While Kenanga Research is positive on the huge contract win, it is mindful of potential start-up losses as evident in the previous Rolls-Royce job.


This has prompted the research house to cut its FY23-24 net profit by 1.3% each.


Kenanga highlighted that the contract took two years from take off to maiden delivery in 2017.


The project broke even at the EBIT level in 2019, and saw its first pre-tax profit of RM1.7 million in 2020.


However, it slipped back to losses of RM33 million in FY21 due to the pandemic lockdown.


For 2022, UMW guided lower losses, which Kenanga had estimated at RM22 million.


Based on the previous contract timeline, Kenanga expects a gestation period during the first three years of operations and only expect breakeven in the fourth year.


That said, Kenanga likes UMW for its mass-market marques under its automotive business, i.e. Toyota and Perodua as well as for its high-margin models such as Toyota Vios and Perodua Alza.


What will boost UMW’s earnings is its automotive business with backlog orders of more than 250,000 units of vehicles, economic recovery and pick up in the aerospace segment.


Most analysts are pretty bullish on UMW and there should be little downside risks for this counter.


#UMW

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