UMW Holdings Bhd - 2009

MARC has assigned MARC-1ID /AAAID ratings to UMW Holdings Berhad’s (UMW) RM300 million Islamic Commercial Papers (ICP)/Medium Term Notes and RM500 million Islamic Medium Term Notes (IMTN).  Concurrently, MARC has affirmed its AAA corporate credit rating on UMW. The ratings reflect UMW’s leadership position in the domestic automotive industry, strong businesses of automotive, equipment, manufacturing and engineering (M&E) and oil and gas.  The ratings also incorporate UMW’s venture into the oil and gas support services sector, which have been funded thus far without untoward impact on its strong capital structure.  UMW’s venture into the oil and gas sector represents a key component of its active business diversification strategy. The near-term outlook for UMW’s automotive operations, an important driver of the group’s revenue and earnings prospects, is nonetheless tempered by cyclical and currently challenging industry conditions.  Over time, MARC expects the business profile of UMW to reflect broader diversifications, reduced dependence on its leading position in the domestic automotive sector and lowered exposure to cyclical vehicle demand.

UMW is a public listed investment holding company, with its largest shareholders being government-linked funds such as Skim Amanah Bumiputera, Employees Provident Fund and Permodalan Nasional Bhd.  The UMW Group ranks among Malaysia’s largest industrial groups in terms of assets.  Of the UMW Group’s four main operating segments, automotive is by far the largest, contributing 79% of consolidated revenues and 87% profits (prior to share of results of equity accounted investments) in 2008.  The equipment segment contributed 11.7% of total revenues and 13.3% of total profits in 2008.  Although the oil and gas, and M&E segments appear to be well positioned for long-term growth, contributions to date remain modest, at below 3% of combined segment results.  Some investments are notably still in a gestational stage.  UMW’s investments in oil and gas, and M&E in the high growth markets of India and China should also contribute to improved geographical diversity over time.

UMW commands a significant market share of the domestic automotive industry’s new vehicle sales through 51%-owned UMW Toyota Motor Sdn Bhd (UMW Toyota) and 38% associated company, Perusahaan Otomobil Kedua Sdn Bhd (Perodua).  A joint-venture with Japan’s Toyota Motor Corporation and Toyota Tsusho Corporation, UMW Toyota assembles, markets and distributes Toyota passenger cars and commercial vehicles.  The Toyota and Perodua marques lead the non-national and national market segments respectively in new vehicle sales.  UMW Toyota has historically generated the bulk of the group’s earnings, sustained by its relatively stable market share which MARC believes will not be materially challenged in the near-term.

UMW’s credit metrics historically have been strong at both holding company and group level.  The primary drivers of its strong consolidated financial metrics are the ability of key operating subsidiaries to fund operations and ongoing capital commitments with cash balances and free cash flow and financial discipline in pursuing expansion.  At holding company level, the operating cash flow of UMW continues to benefit from UMW Toyota’s strong dividend paying capacity through dividends received from UMW Corporation Sdn Bhd (UMWC), UMW Toyota’s intermediate holding company.  As a holding company, UMW is expected to rely on dividends, and principal repayments from intercompany advances to service debt.  The foregoing will result in structural subordination of UMW’s debt to the debt of operating subsidiaries.  Nonetheless, MARC expects the proposed note issuances and debt service requirements to be well accommodated by UMW’s balance sheet and subsidiary distributions to the holding company, respectively.  Net dividends received by UMW at holding company level averaged over RM270 million annually in respect of FY2007 and FY2008.  As there is only moderate predictability of financial results and cashflow generation at most of UMW’s key operating subsidiaries, MARC considers the holding company’s solid financial flexibility to be an important mitigant of the consequences of uncertain dividend flows to UMW.

The stable rating outlook reflects expectations that UMW’s credit profile will remain relatively stable in the near term, keeping within the financial and non-financial parameters of the rating category.

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