Published on 30 Jul 2020.
RAM Ratings has reaffirmed the AA2 rating of UMW Holdings Berhad’s (UMW or the Group) RM2 bil Islamic MTN Programme (2013/2028), as well as the A1 rating of its RM2 bil Perpetual Sukuk Programme. Both long-term ratings have a stable outlook. The RM2 bil Perpetual Sukuk Programme is rated two notches below UMW’s long-term corporate credit rating. This reflects the risk of deferrable profit distributions and the deeply subordinated right of the sukukholders to claims in the event of insolvency.
The reaffirmation of the ratings is premised on the expected recovery of the Group’s credit metrics from FY Dec 2021 onwards, despite its projected weaker operating performance this year amid the COVID-19 pandemic. The Group’s sturdy liquidity profile, strong balance sheet as well as ongoing debt-reduction efforts, help it to withstand the current challenging operating environment. We expect the Group’s businesses to show improvements in the medium term.
The Group’s top line was lifted 3.9% in FY Dec 2019. The revenue of its largest division, i.e. automotive, rose 3.9%, underscored by stronger sales of new Vios and Yaris models. The Manufacturing and Engineering (M&E) division also staged a better operating performance amid significantly more deliveries of aero fan cases. Despite the better topline, excluding RM227.67 mil of one-off items, UMW’s pre-tax profit would have declined by 16.8% to RM443.90 mil. This was mainly due to higher imported costs stemming from the weaker ringgit, higher depreciation costs and lower sales from its equipment division. That said, the Group’s bottom line climbed up 13.9% to RM671.57 mil, boosted by the aforementioned one-off items, substantially narrower losses from its discontinued oil and gas businesses, and healthier contributions from associate Perusahaan Otomobil Kedua Sdn Bhd (Perodua).
UMW’s operating performance, especially for the automotive segment, is expected to be crimped by muted consumer sentiment amid the COVID-19 pandemic, a weaker economy and employment conditions, and tighter financing conditions. The two-month closure of retail outlets during the Movement Control Order (MCO) and conditional MCO periods is expected to further dampen car sales in 2020. That said, UMW’s operating performance is anticipated to gradually improve in 2021 and 2022, buoyed by recovery in the economy, more upbeat consumer sentiment and the launch of several new models. COVID-19 is also seen to suppress the performance of the Group’s equipment and M&E divisions this year, albeit to a lesser extent, before gradually recovering thereafter.
UMW’s ratings remain supported by its strong positions in both the local automotive sector and industrial equipment market. Toyota, distributed by UMW, is the second most popular non-national marque, accounting for 11.4% of total industry volume (TIV) in 2019. The Group is also the distributor of luxury brand Lexus, and the biggest shareholder of Perodua, i.e. the market leader with a 39.8% market share. Last year, UMW made up an estimated 53% market share of the local industrial equipment market. It also boasts a significant market presence in Singapore and Vietnam.
The Group’s balance sheet and liquidity position are deemed healthy. As at end-December 2019, its debt load had been reduced to RM3.06 bil (end-December 2018: RM3.38 bil). This had in turn strengthened its gearing and net gearing ratios (including MMIs) to a respective 0.55 and 0.08 times (end-December 2018: 0.65 and 0.18 times). UMW’s borrowings are anticipated to be gradually pared down over the next three years, with its gearing ratio easing further towards 0.45 times by end-December 2022. As its cash reserves are also envisaged to ebb, the Group’s net gearing ratio (including MMIs) may weaken to 0.20 times as at the same date, albeit still robust. Meanwhile, UMW boasts a strong liquidity position, with a sizeable cash load of RM1.47 bil and RM1.07 bil of money-market investments (MMIs) as at end-December 2019 against RM386.36 mil of short-term debts.
Apart from cashflow generated from its core operations, the Group has also been enjoying steady dividend income from Perodua, receiving RM189.90 mil in FY Dec 2019 (FY Dec 2018: RM129.90 mil). Including this, UMW’s adjusted FFODC would stand at 0.24 times in FY Dec 2019 (FY Dec 2018: 0.19 times). While the Group’s adjusted FFO debt coverage is projected to thin to 0.13 times this year due to the repercussions of COVID-19, it is anticipated to recover to above 0.20 times in the medium term - supported by ongoing debt reduction and a gradually improving operating performance.
Aw Wei Xuan
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Ratings on UMW Holdings Berhad