Highlights/ Comments

• UMW held an analyst briefing on the proposed acquisitions of MBMR and Perodua for a consideration of RM1.4bn, which will be financed through proposed rights issue exercise to raise up to RM1.1bn (depending on the success of the expected MO exercise for the 49.93% minority shareholders of MBMR) and issuance of new UMW shares.

• The subsequent MO exercise will become mandatory once 90% of MBMR’s 49.93% minority shareholders accept the offer at RM2.56/share.

• Management also highlighted the gain on acquisition (negative goodwill) on MBMR will be RM437m (assuming 100% acquisition on MBMR) and nil on 10% of Perodua.

• The purpose of the acquisitions is to further enhance UMW’s automotive profits through higher Perodua contributions. Furthermore, UMW expects synergies from MBMR’s Hirotako group and OMI group (potentially accelerate turnaround of OMI alloy wheel). However, UMW is likely to dispose MBMR’s dealerships (FA and DMSB).

• UMW also shared its intention to consolidate Perodua’s contributions (subject to the agreement from Daihatsu Japan), once it has fully acquired MBMR.

• UMW stressed that it will not raise the offer price of RM2.56/share for MBMR despite not being accepted by the shareholders (MBMR remain listed). Management views the offer price of RM2.56/share as fair and serves as a good exit point for shareholders of MBMR.

• However, we believe the offer price is relatively unattractive, given the 30% discount to MBMR’s NTA of RM1.44bn (Dec 2017 after a massive RM257.7m impairment exercise), while minority shareholders of MBMR will still be able to ride on the potential earnings growth post UMW becoming a major shareholder of MBMR (replacing Med-Bumikar Mara).

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

• Maintain HOLD 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 - 20 Mar 2018