News  In a Bursa announcement, UMW Holdings (UMW) announced that it has proposed to acquire 10% of the total issued and paid-up share capital of e-Lock Corporation Sdn Bhd (e- Lock), equivalent to 650k ordinary shares, for the total consideration of USD4m (or c.RM12.7m, based on the USDMYR conversion rate of 1: 3.1788).

 e-Lock is a one stop e-solution provider that offers a comprehensive suite of web security solutions and services, with market presence in Japan, Taiwan and SE Asia. It has an established track record with rapid growth profile and is one of the few Malaysian IT companies that had managed to penetrate into the Japan market for the past 11 years.

 Note that this is a related party transaction as the current Director/CEO of e-Lock, Dr Leong Chik Weng (who owns 60% stake in e-Lock), is the Senior Independent Non-Executive Director of UMWH. It is also noteworthy that Permodalan Nasional Berhad, a major shareholder of UMW, is also a substantial shareholder of e-Lock by virtue of its 25% shareholdings.

Comments  We understand that this investment will be a platform for UMW to foray into the e-security solutions and services business which is totally new for UMW.

 The purchase of the shares from Dr Leong marks UMW’s first step to further acquiring at least 20.1% stake in the company (which will be done through subsequent issuance of primary shares and rights issue by e-Lock to be subscribed by UMW). Effectively, it will enable UMW to acquire proprietary rights and patents to information digital security and information security products.

 According to the statement in Bursa announcement, the valuation for the purchase consideration of USD4m (or c.RM12.7m) which was derived by adopting the DCF valuation with discount rate of 15%, was opined as fair by the firm of Piper Jaffray & Co (a full-service U.S. investment bank and asset management firm offering M&A advisory, financial restructuring and etc.)

 However, by looking at the investment amount of RM19.56/share offered by UMW (based on the total consideration of c.RM12.7m for 650k ordinary shares), this appears to be at a hefty historical PER valuation of c.1778x and PBV valuation of c.24x. (based on e-Lock’s net profit of RM72,447 (or EPS of 1.1 sen) and net assets of RM5.324m (or NAPS of 81.9 sen) in FYE Jan 13.)

 All in all, we are NEUTRAL on this investment as we believe any material earnings will not be seen in the near term.

Outlook  Although we reckon that UMW's 2H13 vehicle sales will be boosted by the new Toyota Vios that was only launched recently, the significant positive impact will only be seen in FY14 given the delayed delivery timing

Forecast  We leave our earnings estimates unchanged as we see no immediate material impact to the group.

Rating MAINTAIN MARKET PERFORM

Valuation  We are keeping our TP of RM13.39 (which is based on a targeted PER multiple of 14.4x, at +1SD above its 5-year average forward PER) unchanged for now. We will switch our PER valuation method to SOP valuation method once we initiate coverage on UMW O&G which is due for listing on 1^st November 2013.

Risks  Lower than expected vehicle sales.

Source: Kenanga