In a surprise move, UMW has proposed to buy 50.07% stake in MBM Resources Bhd for RM501m and 10% stake in Perodua for RM417.5m at PER of 10x and 12x, respectively, which are lower than UMW’s FY18E PER of 19x, implying earnings and value accretion potential. We are keeping our FY18E/FY19E earnings unchanged until completion of the proposed acquisitions and pending further announcements details. Maintain MP with unchanged TP of RM6.25.

Buying 50.07% of MBMR and 10% of Perodua for total consideration of RM918.5m. In an announcement to Bursa Malaysia, UMW proposed to: (i) acquire the 50.07% stake in MBM Resources Bhd from Med-Bumikar Mara SB and its wholly-owned subsidiary, Central Shore SB for a total cash consideration of RM501m or RM2.56/share or 16.4% premium to the last closing price (valuing MBMR 100% stake at c.RM1b), subsequently triggering a mandatory take-over for all the remaining MBMR shares, and (ii) acquire a 10% stake in Perodua from PNB Equity Resource Corporation Sdn Bhd (PERC) for a consideration of RM417.5m or RM29.80/share to be financed via issuance of 49.3m new UMW shares at RM6.09/share (valued at RM300.0m) and the remaining balance via cash at RM117.5m. Note that, UMW does not intend to maintain the listing status of MBMR subsequent to the proposed mandatory take-over. UMW currently holds 38% equity interest in Perodua, while MBMR currently holds 22.58% effective interest in Perodua. UMW’s effective interest in Perodua will increase from 38.0% to 70.6% after the completion of the proposed acquisitions. We view this latest corporate development by UMW positively as this corporate strategy is value and earnings accretive. The offers for MBMR and Perodua shall remain for acceptance until 28 March 2018, after which, it shall lapse unless UMW agrees in writing to extend the period.

Acquisition PER of MBMR/Perodua are at 38%/25% discount to sector peers. Based on our MBMR’s FY18E earnings forecast, the proposed acquisition works out to 10x PER which is at a 38% discount to the sector average PER of 16x. Similarly, based on Perodua’s FY18E PBT of RM441.2m and assuming a corporate tax rate of 24%, the proposed acquisition for Perodua works out to 12x PER . In terms of P/book value, the acquisition works out to 0.7x FY18E PBV for MBMR compared to the 5- year historical average of 0.66x.

Impact to financials. UMW will fork out RM618.5m cash to finance the acquisitions and we assume the remaining MBMR’s 49.93% stake at RM499.0m will be financed by borrowings, which is expected to increase its net debt and net gearing from RM1.6b and 0.5x to RM2.4b and 0.8x, respectively, as at 31st December 2017 (we have not factored in MBMR net debt of RM83.3m into our illustration). For illustrative purposes, assuming 100% acquisition of MBMR (please refer to the table in the following page), our FY18E/FY19E EPS will be enhanced by 3%/23% (6- month/12-month contribution for FY18E/FY19E). However, we keep our FY18E/FY19E earnings unchanged as well as our TP until completion of the proposed acquisition and pending further announcements.

Strategic Synergies for UMW. The latest proposed corporate acquisitions will allow UMW to increase its strategic stake in Perodua as well as increase its exposure in the commercial vehicle segment via MBMR’s multibrand dealerships, i.e. Daihatsu and Hino vehicles, and widen UMW’s offerings with MBMR’s auto parts manufacturing business. The strategic acquisitions are consistent with UMW’s strategy to enhance its core businesses in the automotive, equipment and manufacturing and engineering segments.

Maintain MARKET PERFORM with an unchanged TP of RM6.25 based on 20x FY18E EPS implying +1.0 SD of its 5-year mean historical PER. Risks to our call include: (i) higher-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 12 Mar 2018