Highlights/ Comments

• UMW has entered into supplemental agreements to revise the disposal price of Indian subsidiaries (automotive component and parts manufacturing) for a total cash consideration of RM111.6m (from RM73.1m in July 2014): 1. 61.08% stake in MK Autocomponents for RM64.9m (from RM21.4m); 2. 55.0% stake in MK Automotive Industries (including intercompany loans worth of RM20m) for RM14.8m (from RM15.6m); and 3. US$20m Compulsory Convertible Debentures (issued by UMW Dongshin Motech) for RM32.0m (from 36.1m).

• Following the amendment, the completion date is expected to be delayed to 15 July 2015 from 30 June 2015.

• The price revision was arrived after taking into account of the settlement amount of certain existing debts of the subsidiaries of MKAIL and MKAL by UMW. We expect some writebacks in the previously recognized provisions for disposal losses of RM93m in 3Q14.

• We remain positive on the UMW’s strategic disposal move due to the challenging Indian automotive component business environment and unfavarouble Indian regulatory policies. Over the years, the division has not been achieving satisfactory performance, dragging the group earnings.

• UMW remain dragged by poor performance of Toyota sales and slowdown in UMWOG, which is likely to be offset by the strong sales of Perodua. UMW is also actively looking for new business opportunities to diversify its earnings portfolio.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.
• Appreciation of US$.
• Plunge in crude oil price and slowdown in O&G exploration.

Forecasts

• Unchanged.

Rating

HOLD

Positives

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

Negatives

• 1) Slump in crude oil prices affecting demand and charter rates for jack-up rigs; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.

Valuation

Maintained HOLD on UMW with unchanged Target Price of RM10.75 based on SOP.

Source: Hong Leong Investment Bank Research - 5 May 2015