UMW Holdings Bhd - 2008

MARC has assigned a corporate credit rating (CCR) of AAA to UMW Holdings Berhad (UMW or the Group). The CCR of AAA indicates UMW’s very strong intrinsic ability and overall capacity for timely repayment of its financial obligations. UMW is a leading domestic industrial group with activities that span automotive, oil and gas services, heavy and industrial equipment as well as manufacturing and engineering businesses. It has significant market share in the domestic automotive sector through 51% owned UMW Toyota Motor Sdn Bhd (UMW Toyota) and 38% associated company, Perusahaan Otomobil Kedua Sdn Bhd (Perodua). The AAA rating reflects a strong business profile that is underpinned by strategic alliances with leading global brands or tie-ups with host country players such as Japan for the automotive and heavy equipment divisions; China, Vietnam and India for the oil and gas segment; and having strong partners for its manufacturing and engineering businesses; and its track record of sound operational performance. The rating also reflects UMW’s continuing robust financial performance and resilience to the challenging automotive industry conditions, improving earnings diversity as facilitated by its successful venture into oilfield services, stable revenue generation from the equipment business, substantial internal cash generation, low debt leverage and favourable financial flexibility. The rating outlook is stable.

Sales and operating earnings are led by the automotive business, which generates about 77.5% and 74.5% of UMW’s sales and earnings in FY2007. UMW Toyota, a joint venture between UMW and Japan’s Toyota Motor Corporation and Toyota Tsusho Corporation, continued to maintain its top position in the non-national car segment while Perodua was the market leader in the national car segment at 33.3% market share. Sales volumes have been sustained through new model launches as well as facelifts of existing models, supported by sound pricing strategies. The combined sales of Toyota and Perodua of 244,145 units gave UMW a 50.1% share of the total industry volume (TIV) of 487,176 units in 2007 despite the year-on-year decline in TIV. MARC expects UMW Toyota to maintain its leading position domestically in the non-national car segment, supported by the diverse product line up and new model plans of Toyota Motor Corporation (rated AAA internationally) which ranked second for global vehicle sales in 2007. Meanwhile, Perodua which benefits from the assistance and support of Daihatsu Motor Corporation, Japan is well positioned in terms of its preparations to be a competitive regional manufacturer of small cars in the post-AFTA era.

The Group’s oil and gas division which has market presence in 13 countries was its second largest earnings contributor accounting for 35.9% of the Group’s earnings in FY2006 but declined to 5.0% in FY2007 due to an internal restructuring in August 2006 which resulted in its then subsidiary, Wuxi Seamless Oil Pipe Co. Ltd becoming a 30.6% associate. The rapid expansion of this division has been achieved through strategic international partnerships which provide the Group with market access to strong economies such as China and India. Going forward, capacity expansion and the addition of new assets will support the growth of revenue and earnings on the back of active deepwater exploration and production activities.

Meanwhile, UMW’s equipment business continues to provide stable revenue generation for the Group as a result of continued demand from the agricultural, construction and logging sectors. UMW is the exclusive domestic franchise holder for established industrial and heavy equipment, namely Toyota forklift and Komatsu, for more than 40 years and it also represents 21 other principals in the equipment industry.

In FY2007, UMW registered a pre-tax profit of RM856.3 million on the back of revenue of RM9.9 billion while operating profit margin stood at 6.3%. Although operating margin is largely reflective of the automotive segment which currently contributes the bulk of the Group’s revenue, it is expected to improve in the next few years on the back of rapid growth and strong contributions from its oil and gas division. The group’s strong generation of internal funds has reduced its need for external borrowings, allowing a modest debt burden to be maintained. In the first quarter of 2008 (1Q2008), UMW’s revenue of RM2.98 billion was 48.4% higher than the previous year’s corresponding quarter driven by higher sales volume achieved by its automotive segment. Operating margin also improved to 8.0% while pre-tax earnings more than doubled to RM292.9 million.

The stable outlook on the rating reflects MARC’s expectations that the Group will maintain strong profitability and cash flow on a consolidated level in 2008 and beyond, in addition to maintaining its present diversified investment strategy and low debt leverage.

Major Rating Factors

Strengths

• Leading player in the domestic automotive market, underpinned by Toyota franchise;
• Solid financial position, strong earnings track-record and large cash balances; and
• Consistent low debt leverage and superior financial flexibility.

Challenges

• Ongoing intense competition from other automotive industry players; and
• Improving earnings diversity.