KUALA LUMPUR (Nov 28): Analysts advised minority shareholders of UMW Holdings Bhd to accept Sime Darby Bhd's mandatory general offer of RM5 per UMW share, even as they raise their earnings forecasts for UMW, on the back of its improved performance for the cumulative nine months ended Sept 30, 2023 (9MFY2023), which exceeded expectations, given better margins and contributions from associates.

UMW reported a net profit of RM173 million for the third quarter ended Sept 30, 2023 (3QFY2023), which took 9MFY2023 core earnings to RM434 million, accounting for 96% of both MIDF Investment Bank Bhd and the consensus full-year estimates, mainly due to the outperformance of associates as well as the equipment and manufacturing and engineering (M&E) divisions.

MIDF raised its earnings forecast by 22.7% for FY2023 to factor in higher associate earnings, especially from higher total industry volume (TIV) assumptions for Perusahaan Otomobil Kedua Sdn Bhd (Perodua), as well as higher revenue assumptions for the equipment and M&E divisions.

“However, [our] FY2024 earnings [forecast] is only revised up marginally by 1.9%, as we expect TIV to normalise on [the] dissipating effect of the prior sales tax holiday and pandemic fiscal incentives, coupled with the potential impact of a fuel subsidy rollback and SST (sales and service tax) hike next year. As it stands, we gather that the latest Perodua order backlog has further receded to 140,000 units, against 200,000 in early 2023, and 155,000 in August,” MIDF wrote in a note.

The research house maintained its "buy" call on UMW, with a marginally higher target price (TP) of RM4.86, from RM4.84 previously, as well as its recommendation for investors to accept Sime Darby’s buyout offer at RM5 a share, which values UMW on a par with the historical mean price-earnings ratio of 12.9 times, and 1.2 times the estimated price-to-book value for FY2024.

“We see this buyout offer as a good opportunity for UMW’s minorities to exit at the peak of the auto demand cycle,” said MIDF.

Meanwhile, Hong Leong Investment Bank Bhd (HLIB), which kept its "hold" call on UMW, lifted its earnings estimates by 15%-17.6% for FY2023-FY2025, on stronger automotive sales and earnings.

“[We] maintain ‘hold’ with an unchanged TP of RM5, based on Sime Darby’s offer price. We are overall positive on the offer price, and advise shareholders to accept the offer, which is higher than our existing sum-of-parts [valuation] of RM3.85,” said HLIB.

TA Securities Holdings Bhd, meanwhile, tweaked its FY2023-FY2025 earnings forecasts upward by 4.6%-15.17%. “Our TP for UMW is benchmarked to the general offer price of RM5/share offered by Sime Darby. We advise shareholders to accept the offer,” said TA Securities.

Bloomberg data showed five "buy" and eight "hold" recommendations for UMW, with a 12-month TP of RM5.11.

UMW's share price was unchanged at RM4.90 at the time of writing on Tuesday, giving it a market capitalisation of RM5.72 billion. The counter has risen over 42% since the beginning of this year.

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