Highlights/ Comments

UMW has proposed the disposal of Indian subsidiaries (involved in automotive component and parts manufacturing) for a total cash consideration of RM73.1m:

1. 61.08% stake in MK Autocomponents for RM21.4m;

2. 55.0% stake in MK Automotive Industries (including intercompany loans worth of RM20m) for RM15.6m; and

3. US$20m Compulsory Convertible Debentures (issued by UMW Dongshin Motech) for RM36.1m.

Upon completion by end 2014, the disposal exercises are expected to result in one off loss of RM93m (before accounting for transaction costs and financial position of the subsidiaries) to UMW.

The proposal was done on the premise of challenging Indian automotive component business environment and unfavarouble Indian regulatory policies. The exit strategy provides opportunity for UMW to reallocate resources and focus on other strategic business units within the group.

We are positive on the UMW’s strategic disposal move, as we concur with the management on the difficult Indian automotive manufacturing market. We believe these businesses had not been performing and continued to report losses, which dragged UMW group profitability.

Note that UMW has already written off its investment in Indian JVs/associates in automotive components and parts in 1Q14, indicating the much negative outlook of the business environment.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.

Forecasts

Unchanged.

Rating

BUY

Positives – 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; 2) Strong growth of Oil & Gas division; and 3) Expanding reach of Manufacturing & Engineering division into fast growing China and India.

Negatives – 1) High crude oil prices affecting margins of its oil based products i.e. lubricants; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.

Valuation

Maintained BUY on UMW with unchanged Target Price of RM12.55 based on SOP.

Source: Hong Leong Investment Bank Research - 30 Jul 2014