• UMW Holdings (UMW) said on Monday that Med-Bumikar Mara and its subsidiary Central Shore Sdn Bhd (CSSB) have separately rejected its offer to acquire the 50.07% collectively held by the two in MBM Resources (MBM). This notice came two days before the deadline of March 28.

• Med-Bumikar held a meeting on Monday and subsequently informed the board of MBM that it was rejecting the offer. There was no reason stated for the rejection. We believe Med-Bumikar is demanding a better offer on the basis of two things: a higher valuation for Perodua (which UMW values at a PE multiple of 9x) and the confidence in a quicker turnaround for its alloy wheel unit.

• Recall that UMW held an analyst briefing last week to defend its valuations for MBM and Perodua. UMW offered RM2.56/share for MBM, stating that this was a 13% premium (to the stock’s 5-day VWAP to March 6) and equivalent to its peak in the past one year. UMW had assigned an enterprise value of RM148mil or 38 sen/share for MBM ex-Perodua, comprising: RM57mil or 15 sen/share for MBM's core operations and RM91mil or 23 sen/share in company net debt.

• UMW reiterated yesterday that its offer price was reasonable. It has decided to extend the offer period to April 30 in a bid to persuade Med-Bumikar. Signs to this point hint that UMW would not budge from its offer price.

• We are surprised by Med-Bumikar’s rejection given that this was an opportunity to exit a flailing business and at what we considered to be an attractive cash offer. The offer price is 11% higher than our FV of RM2.30/share for MBM; which factors in the dwindling sales and thinning margins of its auto distribution business, and the struggle to breakeven its alloy wheel unit.

• Should UMW raise its offer price, the size of the planned rights issue to acquire MBM would increase (from the current range of RM559mil-RM1bil) and this would necessitate more financial support from UMW's key stakeholders. Furthermore, the likelihood of MBM's minority shareholders opting for cash rather than shares is increased.

• Should the deal fail to materialise, we believe it would be negative for UMW and MBM. For UMW, it would have missed the opportunity to take up a higher stake in Perodua at a low price. For MBM, we believe it would have been managed by a more proactive owner which in this instance, intends to dismantle the group and divest the least valuable parts.

• We retain our SOP-based FV of RM6.22/share for UMW as it has up to end-April to secure the first 50.07% in MBM. We caution that there are many moving parts to this (primarily on the timing and funding size required to buy MBM as a whole) and the priority now is to convince Med-Bumikar to let go of its stake at a price that is palatable to all parties.

Source: AmInvest Research - 27 Mar 2018