What’s new

• Lapse of offer. UMW Holdings Berhad (UMW) announced that its proposals to acquire 50.07% equity interest in MBM Resources Bhd (MBMR), 10% equity interest in Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and renounceable rights issue of new ordinary shares in UMW to raise gross proceeds of up to RM1.1b have been lapsed.

• To recap, on Mar’18, UMW had announced to acquire 50.07% equity interest in MBMR from Med-Bumikar Mara Sdn Bhd and also 10% equity interest in Perodua from PNB Equity Resource Corporation Sdn Bhd (PERC). Besides, the Group had also proposed a rights issue to raise up to RM1.1b with intention to fund the bridging facility for acquire of 50.07% equity interest in MBMR and mandatory offer for remaining stake in MBMR (49.93%).

Comment

• Undervalued offer price. We believe the lower offer price was the main reason for the deal to become unsuccessful. UMW proposed offer price of RM2.56 for MBMR, which represents a 16.4% premium over the last closing price but below consensus target price of RM3.18. MBM shareholders seek a higher offer price from UMW and view the offer price as unreasonable.

• Strong resistance from Japanese partners. Besides objections from MBM shareholders, we understand that the Japanese partner, Daihatsu Motor Co Ltd and Mitsui & Co Ltd, who provide key technical expertise and access to technology for Perodua were against the proposed UMW takeover. Daihatsu also expressed in writing and even threatened to stop all technological transfer to Perodua if the deal goes successful.

• Auto sales to soften post SST. We expect 4Q18 sales volume for Toyota and Perodua to soften following the end of tax holiday. Furthermore, exciting models such as new Toyota Vios, Toyota Camry, Toyota Yaris as well as the new Perodua SUV would only come in next year to boost the Group’s revenue.

• Bukit Raja plant to commence operation in 2019. The new plant in Bukit Raja will start production in early 2019 with 50k annual capacity. We understand that this plant will focus on passenger vehicles whilst existing Shah Alam plant will cater for commercial vehicles.
• Deepening ties with Komatsu. UMW’s Equipment division is envisaged to expand with the extension of sales of Komatsu’s products and market penetration to other countries such as Brunei, Singapore, Myammar and Papua New Guinea besides Malaysia. We believe the JV will seize the new growth areas as well as bolster its existing market share via introduction of new products and services to meet customers’ demand.

Earnings Outlook/Revision

• We maintain our earnings forecasts for FY18F and FY19F.

Valuation & Recommendation

• Upgraded to BUY from HOLD on UMW with an unchanged target price of RM6.72 following the recent drop in share price. Our valuation for UMW is pegged at 21x FY2018F PE based on core EPS of 32 sen. The target PE valuation is close to its mean PE of 22x.

• We favour the stock due to:-1) Auto division is expected to register robust growth following new models come in and completion of new plant in Bukit Raja in 2019 (initial 50K capacity p.a.) which will further boost its Toyota sales volume; 2) M&E division is expected to move towards into high value-added manufacturing banking on aerospace venture; 3) Joint venture with Komatsu that will bolster its existing market share; 4) Exit of unlisted O&G segment by 2018 will help to improve the Group’s overall profitability.

Source: JF Apex Securities Research - 1 Nov 2018