Investment Highlights

• We maintain HOLD on UMW Holdings but cut our SOP-based FV to RM5.36/share (from RM5.60) after reverting the group’s stake in Perodua to 38% from 48%. The group announced on Wednesday that the deadline had passed for a deal that would have been the first step towards raising its stake in Perodua to 70.58%.

• Recall that there had been two extensions to end-October for UMW’s offers for MBM Resources and PNB Equity Resource Corp (PERC).

• The plan to raise ownership in Perodua, which was announced in March this year, faced three major obstacles: (1) Daihatsu’s disagreement towards one company owning a majority stake in Perodua; (2) the offer price of RM2.56/share for MBM was seen as too low; (3) the public split within Med-Bumikar, which is the largest shareholder in MBM, that concluded with a “yes” vote by the majority block led by MARA.

• We deem the failure to sign the deal to be negative for UMW and positive for MBM. For UMW, the group missed the opportunity to obtain control of the country’s leading auto company at a low price. The offer of RM2.56/MBM share had priced Perodua at a historical PE of 9.0x and it was equivalent to 7.5x of our FY19F EPS for MBM.

• While UMW missed the chance to take up a bigger role in Perodua, we are assured that the story of the group’s future will now be refocused on its core operations.

• For MBM (BUY with FV of RM3.09), we believe the group has found its legs and is capable of turning things around for itself.

• We have a projection of a 5.0% sales growth for Toyota next year, as new versions of the Camry, Vios and Yaris enter a tough auto market. Honda overtook Toyota as the top non-national automaker here in 2015 and the two had a market share of 34% and 22% respectively in the Jan-Sept period. Vios has historically been Toyota’s best seller here while the Camry is a low-volume, high-margin model (the two accounted for 35% and 6% of FY17 sales); the Yaris hatchback will enter to rival the Honda Jazz.

• The second Toyota plant in Bukit Raja, Klang will come onboard in 2019 as the local hub for its passenger cars with an initial capacity of 50K. The Vios and Yaris will be assembled there for a debut in 1Q19 and mid-2019 respectively. UMW has not declared a utilization rate for the new plant but we believe ~80% for the full year is feasible based on the sales of 38K/39K seen for Toyota passenger cars in FY16/FY17.

• We also project a modest growth in UMW’s other two core segments. The equipment segment will be supported by the formation of the JV with Komatsu to improve market penetration and competitiveness. The M&E segment is expected to return to the black as the aerospace unit breaks even by the end of next year.

Source: AmInvest Research - 1 Nov 2018