Kenanga Investment Bank Bhd, MIDF Research and AmInvestment Bank Bhd were positive on the development, which marked the second time UMW Aerospace had won a Rolls-Royce contract to manufacture fan cases.
“The new contract win and expansion in technical capability comes at an opportune time amid a post-Covid-19 air travel recovery,” said MIDF.
The research house maintained its “buy” call on UMW, with a target price of RM5.28.
Similarly, AmInvest retained its “buy” call with a fair value of RM4.70.
Meanwhile, Kenanga reaffirmed an “outperform” rating with a target price of RM4.80.
UMW Aerospace secured the first contract in 2015, worth RM830 million for 25 years to manufacture and assemble fan cases for Trent 1000 and Trent 7000 aircraft engines.
Under the new contract, UMW Aerospace will focus on manufacturing rear cases for Trent 1000 and 7000 aircraft engines.
Currently, the rear case is imported from overseas and assembled into a complete fan case.
Long-term prospects strengthened
The new contract, which reflects well on UMW’s operational efficiency and credibility, is only expected to commence in 2025.
“This (new contract) translates to RM67 million of additional sales for its manufacturing & engineering division per year on average,” said AmInvest.
The group is expected to spend RM65 million progressively to set up the chemical milling and related processes for manufacturing purposes at its facility in Serendah.
“Given its net cash position of nearly RM2 billion as of the 2022 financial year (FY2022), we believe UMW Holdings will be internally funding the cost,” added AmInvest.
However, due to a strict non-disclosure agreement between UMW and Rolls-Royce Holdings, there are limited details available regarding the Serendah facility.
“In terms of valuation, we do not expect any material impact in FY2023-FY2025 since the award could only come into effect in 2025,” said AmInvest.
However, the research house expected the first sales contributions to kick in from 2025.
Taking a more neutral stance, Kenanga projected a gestation period during the first three years of operations and only expects UMW Aerospace to break even in the fourth year.
For the previous contract, UMW Aerospace broke even at the EBIT (earnings before interest, and tax) level in 2019, and saw its first pre-tax profit in 2020 at RM1.7 million.
Thus, Kenanga trimmed the company’s forecasted earnings for FY2023 and FY2024 slightly by 1.3%.
Gaining a competitive advantage
Despite marginal improvements to earnings in the next few years, the contracts may have bigger implications for UMW.
MIDF emphasised that the acquisition of the electrochemical milling capability was significant as it was lacking in the Asean region.
Such milling capabilities are dominated by South Korea’s LAKWOO Industry and China’s SinoGuide.
“UMW Aerospace will be the first Asean aero manufacturer to have this capability, which will allow it to expand its product range beyond fan cases,” said MIDF.
This could include other advanced aero components such as jet engine afterburners and aircraft wing skin panels.
It expected the existing UMW plant’s utilisation rate to recover to 70%-80% levels in FY2023 from around 50% in FY2022.
Additionally, MIDF believed earnings for FY2023 will exceed pre-pandemic levels.
UMW remains a favourable choice for the research houses, who cited strong earnings visibility at its automotive business backed by order backlogs of over 250,000 and a growing industrial equipment business.
Key risks to the calls are a significant weakening of the ringgit, lower consumer discretionary spending, supply chain disruptions and a worse-than-expected component shortage situation.
At 11.45am, UMW’s share price rose 1.31% or 5 sen to RM3.87, giving it a market capitalisation of RM4.52 billion.