What’s new

• We attended UMW Holdings Berhad (UMW)’s briefing pertaining to the proposed acquisition of shares in MBM Resources Berhad (MBMR) and increment of its stake in Perodua and came away feeling reassured about the Group’s rationalization plans.

• To recap, on 9 March 2018, UMW announced its plan to acquire 50.07% equity interest in MBMR from Med-Bumikar Mara Sdn Bhd (Med-Bumikar) and its wholly-owned unit subsidiary Central Shore Sdn Bhd (CSSB). 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).

• Besides, on 13 March 2017, UMW has proposed a rights issue up to RM1.1b to fund the bridging facility to acquire 50.07% equity interest in MBMR and obliged extension of mandatory offer for remaining stake in MBMR (49.93%). The offer price for right issues will be discounted between 20%-30% from UMW’s share price. In addition, the remaining shareholders of MBMR are given options to sell/exchange their shares for cash or UMW’s share. As such, 2 scenarios are illustrated:

• Scenario 1: Full cash consideration. UMW will use RM1.1b from the right issue proceeds to settle a bridging facility for 50.07% stake in MBMR and the 49.93% stake arising from the mandatory offer.

• Scenario 2: Issuance of new shares (21 new shares of UMW at RM6.06/share for 51 existing shares of MBMR at an offer price RM2.56/share). UMW will only need to fund RM501m for 50.07% stakes in Med-Bumikar and CSSG.

Comment

• Better prospect from consolidation. According to the Group, the proposed acquisition will bring positive impact. The Group’s strategic stake in Perodua will increase from 38% to 70.6% after completing the acquisition of MBMR and Perodua. We believe UMW will benefit from this control since Perodua is a leading marque in the local automotive market with a 35.5% share. Besides, the Group also expects better contribution from MBMR’s auto parts manufacturing business. However, the Group plans to dispose MBMR’s dealership of luxury vehicles.

• Offer price to MBMR is premium to its historical prices. The Group sees the offer price of RM2.56 to MBMR as fair as it translates into a 13.3% premium from 5-day VWAP, 12.3% premium from 1-month VWAP and 11.3% premium from 3-months VWAP. The Group also mentioned that it will not increase the offer price if the proposed acquisition is not accepted by MBMR’s shareholder.

• Earning accretion from consolidation. Assuming the acquisitions are successful, we expect EPS in FY18 to increase by 0.8% (Scenario 1) and 3% (Scenario 2), (assuming it will be take place in 2H18 as the acquisition is expected to complete in 3Q18.). Besides, for full year FY19, we expect EPS to increase by 16.9% (Scenario 1) and 19.5% (Scenario 2).

• 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, the new plant in Bukit Raja (initial 50K capacity p.a.) will be fully completed and operational in 2019. Meanwhile, the M&E division is expected to move towards high value-added manufacturing, i.e. aerospace segment, whilst its total exit of O&G segment by 2018 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 - 20 Mar 2018