Highlights/ Comments

• UMW has proposed to acquire: 1. 50.07% stake in MBM Resources (MBMR) from major shareholder Med-Bumikar Mara for cash consideration of RM501m (RM2.56/share). 2. 10% stake in Perodua from PNB for RM417.5m, which will be satisfied with cash RM117.5m and issuance of 49.3m new UMW shares at issue price of RM6.09/share.

• Should the acquisition of 50.07% stake in MBMR goes through, UMW will have to offer mandatory take-over offer (MO) for the remaining 49.93% stake. Subject to the successful acquisitions and MO, UMW will own effective 70.6% stake in Perodua (from current 38%).

• We are positive on the proposal, which will enhance UMW’s leading position in Malaysia automotive market, in line with UMW’s restructuring exercises to focus on core businesses that include automotive and manufacturing segments.

• UMW will further enhance its relationship with Toyota group which include Lexus, Toyota, Daihatsu and Hino.

• Furthermore UMW will also leverage on MBMR’s interest in automotive parts and components manufacturing segment (widen UMW’s own manufacturing segment), which include OMI group (wheel manufacturing) and Hirotako group (safety products and voice, vibration and harshness products). There are potential synergies to be extracted from the consolidation of both UMW and MBMR group.

• We view the acquisition of RM2.56/share for the 50.07% stakes in MBMR as value accretive for UMW, translating into 2018 PE 10.5x, 2019 PE 9.2x and PB 0.7x (end 2017) as compared to UMW’s own valuation of 2018 PE 21.7x, 2019 PE 15.5x and PB 2.3x (end 2017).

• Similarly, the pricing for 10% stake in Perodua is also value accretive for UMW, at estimated 2018 PE 9.2x, 2019 PE 9.0x and PB 1.0x (end 2017).

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the Malaysian economy affecting demand for automotive and equipment.

• Global supply chain disruption for automotive and manufacturing segments.

• Depreciation of RM.

Forecasts

• Unchanged, pending acceptance of MBMR shareholders and PNB (10% Perodua stake). FY19 earning may increase by RM150m to RM610m (assuming successful MO).

Rating

• HOLD ( )

• UMW continues to be dragged by weakened consumer sentiment, relatively high US$ against RM and continued losses from Rolls Royce fan case manufacturing plant in 2018. Despite these negatives, this recent value accretive acquisition prompts us to raise our rating from Sell to HOLD.

Valuation

• We upgrade to HOLD recommendation (from Sell) with higher TP of RM6.10 (from RM5.20) based on SOP (assuming only Med-Bumikar Mara and PNB accept the offer, but not minority shareholders of MBMR).

Source: Hong Leong Investment Bank Research - 12 Mar 2018