Published on 30 Jul 2021.
RAM Ratings has reaffirmed the AA2/Stable rating of UMW Holdings Berhad’s (UMW or the Group) RM2 bil Islamic Medium Term Notes Programme (2013/2028) as well as the A1/Stable rating of its RM2 bil Perpetual Sukuk Programme. The Perpetual Sukuk Programme is rated two notches below UMW’s long-term corporate credit rating to reflect 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 mainly driven by UMW’s steady performance last year despite the challenges faced by its businesses amid the pandemic. Continued efforts to reduce capital expenditure and active working capital management enabled the Group to build up a sizeable cash pile, putting it in a net cash position. The reaffirmation also considers the Group’s strong positions in both the local automotive sector and industrial equipment market. We expect UMW to retain a strong balance sheet and improve its debt coverage ratios in the next few years, supported by better operating performance across its various segments and gradual debt reduction. These factors balance the uncertainty of whether UMW can sustain its performance given the overall economic challenges. In particular, the automotive sector may be tested by the lingering effects of the pandemic as well as the impact of a prolonged domestic lockdown on the economy, consumer sentiment and car sales. Global disruptions from the chip shortage could affect vehicle production and sales, while the performance of the automotive sector, especially after the sales tax exemption ends, is also uncertain.
The Group’s revenue fell 19% in FY Dec 2020 but operating profit before depreciation, interest and tax (OPBDIT) improved 7% on the back of cost optimisation measures. Pre-tax profit after excluding unusual items still dipped 18% due to a lower share of profit from associates including Perusahaan Otomobil Kedua Sdn Bhd (Perodua). UMW’s revenue and pre-tax profit overall exceeded our projections, notwithstanding a 15% decline in Toyota car sales last year. The better than expected achievement was supported by eight new model launches and a rebound in the automotive sector in 2H 2020 on the back of the government’s sales tax exemption on passenger cars.
We expect some improvement in profit this year, primarily on account of stronger vehicle sales and a leaner cost base. UMW will see the full-year effects of the debut of the new Vios and Yaris (launched in December 2020), the automotive sector continuing to benefit from the sales tax exemption until end-2021. The current total lockdown will however affect some of the Group’s operations, as automotive sales and manufacturing have been suspended during this period. UMW’s equipment segment remains operational while the production of lubricants and fan cases under the manufacturing and engineering division continue undisrupted, but with a 60% workforce. Although we have taken into account some of the effects of the total lockdown, prolonged restrictions will have an adverse impact on our projections, albeit partly mitigated by the strong order backlog, particularly for Perodua and Toyota.
As at end-December 2020, the Group’s debts came up to RM3.09 bil (-2%), translating into gross gearing of 0.53 times. Bolstered by RM3.33 bil of cash and liquid instruments, UMW was in a net-cash position. Adjusted funds from operations (FFO) debt coverage (including dividend income from Perodua) stood at 0.21 times in fiscal 2020 (fiscal 2019: 0.23 times), better than projected. We expect debts to be gradually pared down in the next few years, with corresponding net gearing below 0.20 times, as internal funds largely cover capital expenditure needs. Adjusted FFO debt coverage may trend towards 0.30 times as car sales continue to increase and the effects of the crisis on UMW’s aerospace sub-segment and equipment division wane. On a net debt basis, the same ratio is projected to be above 0.60 times.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522
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Ratings on UMW Holdings Berhad