UMW Holdings Bhd - 2010

MARC has affirmed UMW Holdings Berhad’s (UMW) RM300 million Islamic Commercial Papers (ICP)/Medium Term Notes and RM500 million Islamic Medium Term Notes (IMTN) Programmes at MARC-1ID /AAAID respectively. The ratings are based on the company’s consolidated credit quality which incorporates the group’s leading and dominant market position in the national (Perodua) and non-national (Toyota) car segments, its improved earnings diversification across business lines and geographic markets, and its sound financial performance amidst a challenging year in 2009. Moderating factors include the execution risk associated with its growth strategy for its oil & gas (O&G) division, the potential for the strong pick-up in demand for automotives being tempered by further normalisation and/or tightening of monetary policy, and the reliance in the immediate term on debt financing to build scale in its O&G business. Underlying the stable outlook are the generally improving economic conditions, both domestic and global, and UMW’s strong liquidity position, financial flexibility and prudent financial management practices.
 
UMW is a Bursa Malaysia listed investment holding company which is substantially owned by government-led investment agencies, in particular Skim Amanah Bumiputera (ASB), Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB). The UMW group has four key operating divisions, namely automotive, equipment, manufacturing & engineering, and O&G, with operations covering 14 countries, mainly in Asia. The automotive division remains the single largest contributor to revenues and earnings, producing three-quarters of group revenues and profits. Among the divisions, O&G has been identified as the earnings growth driver for the group given its growth and profit potential and its capacity to counterbalance the risk of overdependence on the automotive sector. As at end financial year ended December 31, 2009 (FY2009), total investments in the O&G division made up 36.7% of the group’s total investments in segment assets and investment in associates. MARC opines that the O&G division, where its exposure is in the upstream sector, will yield significant results in the near-to-medium term premised on the favourable supply-demand dynamics of the industry. Additionally, the group’s investments in high growth economies such as China and India, both in terms of sales and marketing as well as production bases, augurs well for its growth and geographic diversity.

UMW retains a significant market share of the domestic automotive industry’s new vehicle sales through its 51% ownership of UMW Toyota Motor Sdn Bhd (UMW Toyota) for the sales and distribution of Toyota marques and 38% ownership of Perusahaan Otomobil Kedua Sdn Bhd (Perodua) for the sales and distribution of Perodua marques. As a joint-venture partner with Japan’s Toyota Motor Corporation and Toyota Tsusho Corporation, UMW has direct access to Toyota’s products and technical expertise. MARC notes that the recent global recall of some Toyota models had no material impact on domestic demand as evident from the increase in sales of Toyota vehicles for the period January - April 2010 to 28,570 units compared to 24,188 units for the corresponding period last year. MARC continues to believe that UMW’s dominant position in both the national and non-national car segments would not be materially challenged in the near term.

The global financial and economic crisis had a material impact on group performance for FY2009 which saw revenue decline by 16.0% to RM10,720.9 million (FY2008: RM12,769.6 million) and pre-tax profit falling by a steeper 33.7% to RM846.5 million (FY2008: RM1,276.7 million). Cost containment initiatives helped to moderate the decline in operating profit margin to 7.2% (FY2008: 8.4%), but the level remains higher compared to that achieved in financial years 2005 - 2007 of 5.6% to 6.3%. Cash flow from operations (CFO) was robust at RM805.1 million (FY2008: RM645.4 million) with CFO Interest Cover almost doubling to 23.14 times (x) (FY2008: 13.41x). Free cash flow remained negative at RM248.5 million (FY2008: negative RM371.8 million) mostly on account of its O&G spending. As a result, gearing increased to 0.44x (FY2008: 0.27x), with liquidity risk managed through a lengthening of debt maturities as reflected in the increase in the group’s long-term borrowings to 86% (FY2008: 59%) of total group borrowings. The group intends to draw down the remaining RM300.0 million of the programme this year, which could potentially see gearing touching the 0.50x level. The listing of its O&G division, targeted between 4QFY2010 and 1HFY2011 and expected to raise some RM400.0 million, will help pare down debts.

Overall, UMW’s historical credit metrics have been strong at both holding company and consolidated levels. At holding company level, a sustainable dividend policy and commitment to meet its debts are supported by strong operating cash flows of key operating subsidiaries, particularly UMW Toyota.

Major Rating Factors

Strengths

• Market leader in both national and non-national car segments supported by an extensive range of models;
• Established automotive and automotive related business earnings base; and
• Sustained credit metrics amidst a challenging year in 2009.

Challenges