Investment Highlights

• We raise our SOP-based FV for UMW to RM6.22/share (from RM5.50/share) to include the acquisition of a 10% stake of Perodua from PNB Equity Resource Corp (PERC) and 50.07% shareholdings of MBM Resources (MBM) from Med-Bumikar.

• We have not factored in the additional stake in MBM that would be acquired from minority shareholders, which would require a mandatory offer by UMW. UMW aims to hold 100% of MBM, which would provide an effective interest of 22.58% in Perodua.

• Recall that UMW will acquire the 50.07% in MBM from its largest shareholder, Med-Bumikar Sdn Bhd, for RM501mil in cash. We understand that the proposed method to fund the remaining 49.93% (or RM499mil) stake in MBM will be disclosed this week.

• The pro forma impact on the group's revenue and net profit from the acquisition of shares in Perodua and MBM is shown in Exhibit 2 below.

• While there would be earnings accretion from owning a higher stake in Perodua, the impact to group profit from MBM is minimal: its auto parts manufacturing segment is still loss-making (FY17 loss before tax of RM115mil) and its motor trading segment's margin is less than 1% (FY17 PBT: RM11mil).

• We reiterate that the main goal from the proposals on Friday is for UMW to raise its ownership in Perodua to 70.6% from 38% currently. The bigger stake would be accompanied by some form of ownership in its auto parts manufacturing (by OMI) and distribution (by DMSB) business.

• We deem the deal to be positive for UMW as it is taking up a bigger stake in Perodua at a low price. Its valuation of Perodua at RM29.80/share has an implied PE of 9.2x on our estimated FY17 EPS. Meanwhile, MBM's overall valuation is weighed down by the underperformance of its core operations.

• The key challenge for UMW from this acquisition would be to turn around MBM's loss-making alloy wheel unit and finding more synergy within the core operations of the two groups.

Source: AmInvest Research - 12 Mar 2018