UMW’s aerospace sector on profitability route

UMW’s aerospace sector on profitability route

19 Jun 2023

UMW Holdings Bhd’s aerospace division is expected to turn profitable by this year, on the back of stronger sales and improved efficiency in the segment’s manufacturing processes.

Kenanga Research in a report said it estimates fan cases sales volume to double in 2023 at 192 units, compared to 96 units in 2022 with full capacity of 250 units expected by 2025.

“Additionally, UMW also receives a fixed margin under a cost-plus model agreement and is able to fully pass through fluctuation of input costs to Rolls-Royce with a natural foreign exchange hedging mechanism (sales and materials costs in US dollars).

“Additional upside in profitability could come from economies of scale on higher volumes and improved efficiency in manufacturing processes.”

UMW Aerospace Sdn Bhd secured its first contract in 2015 worth RM830mil to manufacture front fan cases and assemble them into complete units for shipment to Rolls-Royce UK.

According to Kenanga Research, the contract took two years to take off, with maiden delivery in 2017.

“It achieved break-even at the earnings before interest and tax level in 2019 and saw its first pre-tax profit in 2020 at RM1.7mil. However, it slipped back to losses of RM33mil in 2021 due to the pandemic lockdown, but pared its losses to RM9.4mil in 2022.”

Going forward, Kenanga Research said UMW Aerospace had the potential to expand to new markets.

“UMW Aerospace is able to scale up the production of its existing products and further expand its capabilities via new collaborations to venture into new products.

“In April 2023, it secured a second contract worth RM1bil for 15 years to exclusively manufacture rear fan cases which were previously imported from a North American supplier.”

Additionally, Kenanga Research said the company’s new chemical milling plant and related processes to manufacture the rear case will undergo trial run in 2024, with its first delivery by 2025 at maximum capacity matching the front cases at 250 units.

“Subsequently, the new exclusive chemical milling plant, which is the only one in Asia, has received several requests from local original equipment manufacturers for future collaboration.”

Meanwhile, MIDF Research said UMW Aerospace is well positioned to ride on Malaysia’s aerospace ambitions.

Globally, MIDF Research said the aero engine market was worth US$38bil (RM175bil) in 2018 and is projected to grow to US$211bil (RM974bil) by 2030.

“In Malaysia, the broader aerospace industry was valued at RM16.2bil (RM8.8bil export) in 2019, with an ambitious revenue target of RM55bil by 2030,” it said.

Source: The Star