Investment Highlights

• We maintain HOLD on UMW but cut our FV to RM5.85/share (from RM6.22) to exclude the value from the majority stake in MBM Resources (MBM) that the group intends to acquire. This is in view of the fact that the group’s plans to acquire the 50.07% stake in MBM from Med-Bumikar is not likely to materialize. Nevertheless, our SOP-based FV has taken into account the additional 10% stake in Perodua that it aims to acquire from PERC.

• The Star reported on Wednesday that Daihatsu, one of the key principals for MBM, has stated in a letter to MBM that it was not in favour of one company owning a majority stake in Perodua. There was no rationale stated for this.

• MBM chairman Abdul Rahim Abdul Halim said UMW had not offered a higher price for MBM, and that there were now issues that were “more difficult” than the pricing. Recall that MBM would require approvals from its key principals that it distributes for (Daihatsu, Volvo, Volkswagen and Mitsubishi) for UMW’s purchase of a majority stake in the company.

• He added that apart from MARA, only two of the other six families/shareholders that make up Med-Bumikar are supportive of the deal. The other four are said to be in a “delicate situation” given the disagreement by Daihatsu. This ratio (2 yes: 4 no, of the 6 families in Med-Bumikar) has not changed since April 2, when Abdul Rahim spoke to The Edge Malaysia weekly.

• UMW has until April 30 to secure the deal. We believe signs point towards a failure in UMW and Med-Bumikar to agree on the exchange of the 50.07% stake in MBM:

1) UMW has repeatedly asserted that it will not budge from the offer of RM2.56/share for MBM, which was the main contention by Med-Bumikar. The news today denotes that UMW has kept to its offer price.

2) MBM had also said on April 2 that it had requested for UMW to refrain from engaging with MBM’s key principals on the merits of the deal, as this may “confuse or mislead” and jeopardize business relationships.

3) MBM (via Abdul Rahim) has asserted that MBM and MedBumikar have to be under one roof as part of a supplementary agreement signed when Med-Bumikar entered MBM. He previously said the 20%-associate stake in Perodua was to remain under Med-Bumikar, as part of the agreement with other Perodua shareholders in 1999.

• Should the deal fail to materialize, we believe it would be negative for UMW and MBM. For UMW, it would have missed the opportunity to take up additional shares 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.

Source: AmInvest Research - 11 Apr 2018