Highlights/ Comments

• UMW has proposed to distribute its shareholding in 55.73% owned subsidiary UMW-OG to UMW shareholders, which is expected to complete by April 2017.
• UMW will undertake a bonus issue of 1,204.8m redeemable preference shares (RPS) of RM0.01 each to UMW shareholders on the basis of approximately 1.03 RPS to 1 existing ordinary share of UMW. The redemption of all the RPS will be satisfied in the form of UMW-OG shares via the distribution of 1,204.8bn UMW-OG shares (currently held by UMW) to UMW shareholders.
• The issuance and redemption of the RPS pursuant to the Proposed Bonus Issue and Proposed Redemption will be wholly capitalized from UMW’s share premium and retained earnings (reducing UMW’s book value).
• The exercise is in line with UMW’s plan to exit O&G industry, including its interests in other investments in the sector. UMW will be fully focused on managing its growth and risks related solely to its automotive (new automotive manufacturing plant), equipment, manufacturing and engineering businesses (new Rolls-Royce fan cowl plant).
• We believe the exercise is attractive and value accretive to existing shareholder of UMW: 1. Option to realize one off cash dividend of up to 67sen/share (based on HLIB UMWOG target share price of 65sen), equivalent to 14.5% dividend yield. 2. Invest in UMW, without exposure towards UMW-OG. 3. Deconsolidation of UMWOG (loss making and high gearing), which will improve earnings and balance sheet of UMW.
• We understand that UMW is subject to further impairments related to UMWOG assets and UMW’s investment in other O&G assets (value segment) in upcoming 4Q16 result.

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, pending completion of the exercise.

Rating

BUY (↑)

• With the potential realizable dividend yield of up to 14.5% (dependent on share price movement of UMWOG), we believe UMW presents attractive valuation for investors, despite the drags from ongoing subdued consumer sentiment, RM depreciation and slowdown in O&G activities affecting all its business segments.

Valuation

• Upgrade to BUY with higher Target Price of RM5.60 (from RM4.00) based on targeted dividend yield of 12%. We understand that share price will not be adjusted post bonus issue of RPS. However, we note that share price may consolidate post completion of exercise by April 2017.

Source: Hong Leong Investment Bank Research - 20 Jan 2017