Highlights/ Comments

• UMW has proposed rights issue to raise the necessary proceeds to finance the proposed acquisition of: 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. 3. 49.93% stake in MBMR from minority shareholders under Mandatory Take-Over Offer (MO), subject to successful acquisition of the first 50.07% stake. The offer price under MO will be same as cash offer RM2.56/share or issuance of new UMW shares at issuance price of RM6.09/share (exchange ratio of 21 new UMW shares for every 50 MBMR shares).

• The rights issue is intended to raise up to RM1.1bn, depending on the successful of the expected MO exercise. Pricing of rights issue shall be based on 20-30% discount to TERP of UMWH shares on 5-day VWAP.

• Based on worst case scenario (full cash), UMW shall raise RM1.1bn, which shall be funded through rights issue of UMW 243.5m shares (based on RM4.40/share and 1 for every 5 UMW shares). UMW’s BPS will raise from RM2.64/share (based on Dec 2017) to RM3.30/share and net gearing shall improve from 51.6% to 33.6%.

• The whole exercise is expected to complete in 3QCY18.

• Despite the potential share dilution impact, we view the acquisition of MBMR and Perodua as value accretive for UMW, translating into 2018-19 PE of 9x to 11x and PB 0.7x to 1.0x (end 2017) as compared to UMW’s own valuation of 2018 PE 23.1x, 2019 PE 16.5x and PB 2.5x (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 +32.6% or RM150m to RM610m (assuming successful MO), which shall be partially offset by dilution impact up to 20% (assuming worst case scenario).

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. However, the proposed acquisition of stakes in MBMR and Perodua is value accretive to UMW.

Valuation

• We maintain HOLD recommendation with unchanged TP of RM6.10 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 - 14 Mar 2018