• UMW Holdings (UMW) has proposed a rights issue that could raise up to RM1.1bil to pay for the acquisition of MBM Resources (MBM) in its entirety.

• We simplify the announcement by UMW to the following:

1) The rights issue would fund both the 50.07% in MBM it plans to acquire from MedBumikar and the remaining 49.93% triggered by the mandatory offer (MO).

2) UMW is valuing MBM at RM2.56/share. Med-Bumikar will be paid in cash, but the minority shareholders (remaining 49.93%) will have two options: cash (cash consideration) or new UMW shares of equal value (shares consideration; at a ratio of 21 UMW shares of RM6.09/share for every 50 MBM shares of RM2.56/share).

3) Based on this, UMW illustrated two extreme outcomes: all of the minority shareholders opting for cash (full cash scenario) or shares (full shares scenario). (see Exhibit 1). Under the full cash scenario: UMW would raise a total of RM1.1bil from the rights issue to pay for MBM in its entirety with cash (RM1bil; this comprises RM501mil to Med-Bumikar for 50.07% in MBM, and another RM499.3mil for the remaining 49.93%), for working capital (RM39mil) and to cover expenses from the proposal (RM32mil). Under the full shares scenario: UMW would raise a total of RM559mil to pay MedBumikar for the 50.07% in MBM with cash (of RM501mil for the 50.07% in MBM from Med-Bumikar), for working capital (RM36mil) and to cover expenses from the proposal (RM32mil).

4) The size of the rights issue will depend on the number of minority shareholders opting for cash. In other words, the amount of cash it needs to raise will be lessened should there be more minority shareholders of MBM opting to be compensated with UMW shares.

5) We emphasize that the cash would be obtained from a bridging facility, and funds raised from the rights issue will mainly go towards repaying this.

• The general timeline for the pricing of the rights shares is as follows:

1) MBM minority shareholders will have until the closing date of the MO to choose cash or shares. UMW can determine the amount it needs to raise at this point. From there, it would determine the entitlement basis (the number of UMW shares entitled from every rights share) and the rights issue price at the price-fixing date.

2) UMW said the theoretical ex-rights price (TERP) would be determined based on the 5- day VWAP immediately preceding the price-fixing date. It guided that the rights issue price would be at a 20-30% discount to TERP, using rights issuances exceeding RM1bil on Bursa Malaysia from the past 3 years as a measure.

• UMW aims to complete the rights issue by 3Q18. It will submit the proposal within 3 months from acceptance by Med-Bumikar.

• The approvals required for the rights issue:

1) It is conditional on UMW acquiring MBM from Med-Bumikar and the remaining shareholders.

2) Approval from UMW shareholders at an EGM.

• On the rationale for the rights issue:

1) It would allow UMW to conserve its existing cash by tapping on a bridging facility.

2) UMW said it would allow its existing shareholders to avoid dilution in their interest, by participating in the rights issue and at a discount to the current market price of UMW.

• For UMW, the enlargement of its share base will depend on the number of new shares issued. This will be based on the rights issue price and entitlement basis. We estimate an FY18 EPS accretion of 11-14% for UMW from the consolidation of MBM and additional 10% stake in Perodua, based on the potential impact to its share base from the full cash scenario and full shares scenario. (see Exhibit 2 & 3)

• We estimate an ex-all fair value of RM5.49/share and RM5.61/share for UMW based on the full cash scenario and full shares scenario respectively. Based on the aforementioned ratio between UMW and MBM shares (21 UMW shares for every 50 MBM shares, or 1: 0.42), MBM shareholders would see a potential return of RM2.25 and RM2.30 under the full cash scenario and full shares scenario respectively. Both are lower than the RM2.56/share offered by UMW and we opine that most MBM shareholders will opt for the cash option as a result.

Source: AmInvest Research - 14 Mar 2018