What’s new

• UMW Holdings Berhad (UMW) announced to acquire 50.07% equity interest in MBM Resources Bhd (MBMR) from Med-Bumikar Mara Sdn Bhd. The purchase will trigger a mandatory offer for remaining shares in MBMR.

• Besides, UMW also intends to acquire 10% equity interest in Perodua from PNB Equity Resource Corporation Sdn Bhd (PERC).

• The offer price of RM2.56 for MBMR represents a 16.4% premium over the last transacted price on 9 March 2017.

• MBMR is an investment holding company, which involves in the distribution and dealership of international and local vehicle brands in Malaysia such as Perodua, Daihatsu, Hino, Mitsubishi, Volkswagen and Volvo marques, as well as manufacturing of automotive parts.

• Both offers will cost nearly RM1bil and valid until 28 March 2018.

Comment

• Broaden control over Perodua. We view the deal positively as we believe the acquisition of MBMR is an approach by the Group to strengthen its auto segment since MBMR currently holds 22.58% effective equity interest in Perodua. If both proposals are accepted, it will increase UMW’s stake in Perodua from 38.0% to 70.6%. Earnings will be further boosted with full consolidation from current equity accounting method. UMW will benefit from this control since Perodua is a leading marque in local automotive business with a 35.5% market share.

• Margin to improve. Also, we also expect the Group’s margin to improve from these acquisitions (as MBMR also involves in other businesses such as dealership in international vehicle brands in Malaysia such as Daihatsu, Hino, Mitsubishi, Volkswagen and Volvo marques, as well as manufacturing of automotive parts) coupled with the new SUV, Alza to be introduced by Perodua this year.

• Offer price to MBMR deemed reasonable. In our view, the offer price is fair as it implies forward PE of 10.04x, which is in line with the valuation of other small cap stock of 8-10x, and on par with consensus target price of RM2.59 (forward PE of 10.16x).

• Looking forward, we expect the Group to re-focus on three core businesses which will resume positive growth momentum over the longer term. Auto division is expected to cement its robust growth following the increase in controlling stake in Perodua. For its Toyota  models, new plant in Bukit Raja (initial 50K capacity p.a.) will be fully completed and in operational in 2019. Meanwhile, M&E division is expected to move towards into high value-added manufacturing, i.e. aerospace segment, whilst its total exit of O&G segment by 2018 which will help to improve the Group’s overall profitability.

Earnings Outlook/Revision

• We maintain our earnings forecasts for FY18F and FY19F pending finalisation of the acquisitions.

Valuation & Recommendation

• Maintain HOLD call on UMW with an unchanged target price of RM6.00. Our valuation for UMW is pegged at 24x FY2018F PE based on EPS of 25 sen. The target PE valuation is close to its mean PE of 22x.

Source: JF Apex Securities Research - 12 Mar 2018