MBMR’s major shareholders, Med-Bumikar Mara SB and Central Shore SB have received a letter of offer from UMW Holdings Bhd to acquire 50.07% MBMR stake for a cash consideration of RM501.0m or RM2.56/share. The offer price is deemed at the lower end despite offering of >15% due to the Acquisition PER of MBMR is at 38% discount to sector peers and the offer at 10x FY18E PER (9% discount to MBMR’s 5-year fwd mean PER). Hence, we are not surprise if the shareholders ask for a higher offer price. Maintain OP with a TP of RM2.85.

Letter of Offer for 50.07% stake by UMW. In the announcement to Bursa Malaysia, MBMR has been informed by Med-Bumikar Mara Sdn Bhd and Central Shore Sdn Bhd, a wholly-owned subsidiary of Med Bumikar, that they have received a letter of offer dated 7th March 2018 from UMW Holdings Bhd, which proposed to acquire: (i) 193.5m of MBMR shares or 49.5% stake held by Med Bumikar Mara SB; and (ii) 2.2m MBMR shares or 0.57% stake held by Central Shore SB. The offer entails a total cash purchase consideration of RM501.0m or RM2.56/ MBMR share (valuing MBMR 100% stake at c.RM1b) which is at 16.4% premium to the last closing price and subsequently triggering a mandatory take-over for all the remaining MBMR shares. Note that, UMW does not intend to maintain the listing status of MBMR subsequent to the proposed mandatory take-over. The offer shall open for acceptance until 28th March 2018, after which, it shall lapse unless UMW agrees in writing to extend the period.

Acquisition PER of MBMR at 38% discount to the 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. In terms of P/book value, the acquisition works out to 0.7x FY18E PBV compared to 5-year historical average of 0.66x.

Outlook. Perodua’s actual sales in 2017 came in at 204.9k units exceeding its initial target of 202k units, and it subsequently aimed higher for 2018 at 209k units with expected volume boost from the allnew Perodua Myvi and with introduction of the all-new Perodua SUV (D38L). The Motor Trading Division will benefit from the strong market reception of the Perodua affordable variants and stronger sales from Volvo premium segment. The Auto parts manufacturing division is estimated to break even in FY19 with its alloy wheels plant expected to produce at least c.73% of the maximum capacity (maximum capacity at 750k units).

Maintain OUTPERFORM with or without the potential Mandatory General Offer. While the offer price of RM2.56 is lower than our TP of RM2.85 (based on 11x FY18E EPS which at its 5-year mean Fwd. PER), it is still >10% from the current level. The stock is trading at an undemanding 8.5x FY18E PER compared to the 5-year forward average PER of 11x. All in all, we like MBMR for; (i) its deep value stake in 22.58%-owned Perodua (based on our FY18E profit and attached 12x PER value, MBM’s stake at c.RM908.7m is 6% higher than MBMR current market capitalisation), (ii) expected strong turnaround in the alloy-wheel division segment underpinned by the all-new Perodua variants, and (iii) a stronger MYR. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) lower-than-expected associates’ contribution.

Source: Kenanga Research - 12 Mar 2018