Highlights/ Comments

• Major shareholder of MBMR, Med-Bumikar Mara has rejected UMW’s offer price of RM501m (RM2.56/share) to aquire its 50.07% stake in MBMR.
• With the rejection, there will be no further Mandatory Take- Over Offer for the 49.93% minority shareholders of MBMR and cancellation of the proposed rights issue exercise by UMW.
• UMW has announced that it will extend the validity period for the MBMR Offer, from 28 March 2018 to 30 April 2018. UMW will continue to engage Med-Bumikar Mara on the merits of the Proposed MBMR Acquisition for further consideration.
• Nevertheless, UMW’s offer to acquire 10% stake in Perodua from its major shareholder PNB for RM417.5m (RM117.5m cash and RM300m worth of 49.3m new UMW shares) is still on the table and we expect the offer to go through.
• Without acquiring MBMR, UMW will only own 48% stake in Perodua (assuming PNB accepts the offer) and will not be able to consolidate Perodua contributions.
• We believe the existing offer price of RM2.56/share is relatively unattractive, given the huge discount of 30% to MBMR’s NTA of RM1.44bn (as at Dec 2017 after a massive RM257.7m impairment exercise).
• We believe there is a high chance of UMW to raise the offer price. UMW will have to weigh on strengthening its automotive earnings, consolidating Perodua contribution and extracting potential synergies with MBMR group.

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 PNB (10% Perodua stake) and further development of MBMR acquisition exercise. Without MBMR, UMW’s FY19 earning may only increase by +8.7% or RM40m to RM500m (accounting for additional 10% in Perodua), and partially offset by 4% share dilution (new shares issuance to PNB), netting a +4.7% earning accretion to bottomline.

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). However, there is potential downgrade in TP if UMW fails to acquire MBMR by 30 April 2018.

Source: Hong Leong Investment Bank Research - 27 Mar 2018