Investment Highlights

• We maintain HOLD on UMW Holdings with a lower FV of RM5.85/share (from RM6.06/share).

• UMW announced on Monday it would form a JV with Japan’s Komatsu Ltd for its heavy equipment business. This was a follow-up to the LOI which the two parties have signed in August last year.

• The JV will carry on UMW’s heavy equipment business which has operations in Malaysia, Brunei, Myanmar and Papua New Guinea. Meanwhile, the Singapore operations will be run by a unit under the JV.

• Komatsu will acquire a 26% stake in the JV for RM133.9mil, valuing the unit in its entirety at RM515mil. This amount will be retained by UMW for its working capital.

• The deal is intended to strengthen and expand the market penetration and competitiveness of the business. It is undergoing due diligence and will be completed by the end of the year. It does not require shareholders’ approval.

• 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 subsegment, 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 are positive on the JV as it is meant to improve UMW’s access to acquire Komatsu products swiftly with the goal of improving its market penetration. The equipment segment is UMW’s second biggest contributor to the group’s topline (13%) and its performance is tied to demand from infrastructure products.

• However, we adjust our earnings from FY19 downwards to account for Komatsu’s ownership in the JV. Likewise, our SOP-based FV has been adjusted to RM5.85/share from RM6.06/share to reflect this change and factor in the cash proceeds from the sale of 26% stake to Komatsu.

Source: AmInvest Research - 3 Jul 2018