• We maintain HOLD on UMW Holdings (UMW) with an unchanged SOP-based fair value of RM5/share. The group announced last Tuesday it had signed an LOI to form a joint venture (JV) with Japan-based Komatsu Ltd for the heavy equipment business.

• UMW has been a distributor for Komatsu products (forklifts, etc. for the use of construction and mining activities) in Malaysia, Singapore, Myanmar and Papua New Guinea. The relationship between UMW and Komatsu has spanned decades (since 1965). This operation falls under the Heavy Equipment sub-segment, which is placed under Equipment together with two other sub-segments (Industrial Equipment and Marine & Power Equipment). Apart from the Komatsu franchise, the Heavy Equipment sub-segment also carries several other products including those by Rosenbauer (fire trucks) and LS Mtron (tractors).

• We understand that UMW is facing certain limitations from its present arrangement, namely that it is unable to get access to certain Komatsu products in a more immediate manner. The JV partnership enables UMW to acquire products swiftly with the interest of improving its market penetration. UMW hopes to form the JV by the end of the year. It will hold a 74% stake in the JV entity with Komatsu holding the remaining 26%.

• The Equipment segment is the second biggest top-line contributor (after Auto), accounting for 13% of the group's revenue last year. In 1H17, it accounted for a similar quantum with RM694mil in revenue. While top-line growth has not been great (dropped 30% YoY last year), PBT margins were relatively stronger at 8-9% (vs. Auto's 4%).

• We are unable to ascertain the earnings accretion that could come from realising the JV, at this juncture. However, the prospects for sales of Komatsu heavy equipment by the group could improve given its access to newer products, placing it in a better position to meet the demand of its customers.

Source: AmInvest Research - 30 Aug 2017