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

The ratings affirmation considers UMW’s lead market position in the domestic automotive industry and strong financial performance, characterised by healthy operating cash flow, low leverage and strong liquidity. Notwithstanding a one-notch uplift incorporated in the rating based on implicit support from parent Permodalan Nasional Berhad (PNB), a government-linked investment company, MARC Ratings opines that as UMW’s credit profile has steadily improved, its standalone rating could be revised upwards if it sustains its key credit metrics.

UMW holds the majority of the domestic automotive market share, collectively through the marques under its stable, namely Toyota, Lexus, and Perodua. For 1Q2023, it recorded total sales volume of 103,783 units or 53.9% of total industry volume (2022: 383,054 units or 53.2%). While the catalyst for the strong sales performance was the sales tax exemption for vehicle bookings made before June 30, 2022, and registered by March 31, 2023, UMW has been able to maintain its competitive strength by offering well-known marques at different price ranges and segments. Its longstanding collaboration with the Toyota group is an important factor in its sales performance.

Its key marques are Perodua for the mass-market segment, and Toyota and its sister brand Lexus for the mid-market and up market segments. Among some of the models launched in 2022 were the Toyota Corolla Cross Hybrid and the all-new Perodua Alza. For 2023, backlog orders of about 250,000 units would sustain its sales performance in the automotive segment, providing some offset to any fall in demand following the end of the sales tax exemption period. Performance of its other segments, namely industrial and heavy equipment as well as manufacturing and engineering that have shown improvement since the reopening of the economy, is expected to sustain growth momentum in 2023. Overall group profit margin is expected to remain in the single digit, reflecting the competitive nature of the automotive industry.

Group borrowings reduced to RM1.5 billion, translating to a low debt-to-equity ratio of 0.31x (adjusted to include 50% of Perpetual Sukuk) as at end-March 2023 with RM1.25 billion and RM1.1 billion outstanding under the Sukuk Musharakah and the Perpetual Sukuk programmes. On a consolidated basis, the group is in a net cash position. Its liquidity position remains healthy with a cash balance of RM2.7 billion, providing headroom for expansion through acquisitions.

At the holding company level, UMW’s debt servicing and repayment ability relies mainly on dividends from its key operating entities. In 2022, it recorded revenue of RM213 million; borrowings consist of the outstanding sukuk, with the first sukuk repayment of RM400 million due in November 2025. Dividend of RM102.8 million paid in 2022 (2021: RM46.7 million) reflects a moderate dividend payout policy that considers capital expenditure requirement at subsidiary levels. Cash and bank balances stood healthy at RM296.3 million as at end-2022.