News In a Bursa announcement, UMW Holdings (UMW) announced that its wholly-owned subsidiary, UMW Corporation, has proposed to dispose its: (i) 61.08% equity interest in MK Autocomponents (MKA), (ii) 55% equity interest in MK Automotive Industries (MKAI), and (iii) Compulsory Convertible Debentures of 106.2m aggregating USD20m to Dato' Muthukumar A/L Ayarpadde for a total cash consideration of RM73.1m.
MKA and MKAI are investment holding companies with subsidiaries involved in the manufacturing of automotive components and parts in India.
According to the announcement, the proposed disposals are expected to result in a loss of c.RM93m, which is derived before accounting for transaction costs and the financial position of MKA and MKAIL at completion date.
Comments Although the proposed disposal (to be completed by year end) is expected to record a one-off loss of c.RM93m, we lauded the management's move and are MILDLY POSITIVE on the deal given the tough auto-component business environment and regulatory policies in India. Recall that this autocomponent business which is parked under the group's Manufacturing and Engineering segment recorded a loss of RM40m in FY13.
Outlook For FY14, the group has in the last quarter forecasted the combined total sales from UMW Toyota Motor and Perodua to achieve 295.4k units (+3%), a forecast which is shared by us (295.9k units, +3%). Despite a higher sales forecast, we are expecting margin to decline in view of the cost push inflationary factor as well as the stiff competition, particularly in the B & C segment.
On the Oil and Gas segment, it is noteworthy that UMWOG is set to receive three new jack-up rigs in FY14 which we believe should be able to secure contracts given that there are at least 17 rig contracts that are expiring from mid-2013 to 2015. Note that we have already factored these potentials into our estimates.
Forecast We leave our recurring NP assumptions for FY14E and FY15E unchanged for now given the one-off nature of the exercise as well as the immaterial contribution from this auto-component business segment in India.
Rating Maintain MARKET PERFORM
Valuation No changes to our TP of RM12.25 which is based on a SoP valuation (implies 15.2x FY14 PER, close to +1SD above the average PER mean).
Risks to our call Lower-than-expected vehicle sales.
Source: Kenanga
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