MARC has assigned its AA+_IS rating to UMW Holdings Berhad’s (UMW) RM2.0 billion Islamic Medium-Term Notes (IMTN) Programme (Sukuk Musharakah) and AA-_IS rating to UMW’s RM2.0 billion Perpetual Sukuk Programme (Perpetual Sukuk). The two-notch rating differential between the Sukuk Musharakah and Perpetual Sukuk is in line with MARC’s methodology on notching principles of subordinated and hybrid instruments. All ratings carry a stable outlook.

UMW’s established operating track record, and steady and sizeable market share in domestic automotive sales are key rating drivers. These strengths are underpinned by a strong balance sheet characterised by a low-to-moderate leverage position. A key moderating factor is the group’s thin margins. The long-term rating also incorporates parental support from Permodalan Nasional Berhad, a government-linked investment company which has an effective interest of about 61.3% in the holding company.

Of its key businesses — automotive, equipment, and manufacturing and engineering (M&E) — the automotive segment remains the group’s core revenue and earnings generator, accounting for about 78% and 84% in 2020. Its Toyota, Lexus and Perodua marques continue to collectively account for a sizeable share of about 52.8% of Malaysia’s total industry volume of passenger vehicles as at end-1H2021. We view the ability of the UMW group to maintain a strong market position in the domestic automotive industry stems from its longstanding involvement in the industry and continued investments in capacity building and model upgrades as well as its collaboration with key global automakers, namely Toyota Motor Corporation (Toyota) and Daihatsu Motor Corporation (Daihatsu).

UMW Toyota Sdn Bhd which assembles and sells Toyota and Lexus models in Malaysia is owned by UMW (51%) and the Toyota group (49%). UMW has a 38%-interest in Perusahaan Otomobil Kedua Sdn Bhd (Perodua) in which the Daihatsu group has a 25%-stake. Aside from the automotive segment, UMW also has a strong position in equipment, in both the industrial and heavy segments, through the sales and lease of Toyota forklifts and Komatsu heavy equipment, among others. Performance of the segment was weighed down by the impact of the pandemic, which halted the operations of its target industries (mining, quarrying, logging, agriculture and construction) during lockdown periods. Its M&E division is the leading domestic supplier of original equipment and replacement market products that include shock absorbers and motorcycle suspension systems. This division also experienced sales contractions during the pandemic.

For 1H2021, the UMW group’s revenue rebounded to RM5.4 billion (1H2020: RM3.6 billion) following a sharp revenue decline of 18.6% y-o-y to RM9.6 billion in 2020 owing to the impact from the pandemic. The rebound was driven by the improved performance of its automotive segment which benefitted from a sales tax holiday. We view that the extension of the tax holiday to end-2021 would boost sales during this period but over the longer term, any lasting improvement in consumer sentiment to support sales will rest on the strength of the economic recovery. Automotive margins are low amid intense market competition, particularly in the passenger car segment and will continue to weigh on group profitability. For 1H2021, pre-tax margin stood at 3.62% (1H2020: 0.12%).

Total group borrowings continued to decline since 2018, standing at RM2.2 billion as at end-1H2021. Adjusted debt-to-equity (DE) ratio was 0.47x and net DE was 0.22x on the back of sizeable cash and bank balance of RM1.5 billion. Over the near term, its planned capex is deemed moderate at RM412 million p.a. in 2022–2024 and is expected to be funded by internally generated cash. This includes the RM270 million expansion of its Bukit Raja plant for the local assembly of hybrid electric vehicle models.

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