UMW is proposing to undertake a rights issue to raise up to RM1.1b to finance the recently proposed acquisition of 50.07% stake in MBMR, including the mandatory takeover offer. We are keeping our FY18E/FY19E earnings unchanged until completion of the proposed acquisitions and pending further announcements. Maintain MP with an unchanged TP of RM6.25.

Propose rights issue to raise gross proceeds up to RM1.1b. In an announcement to Bursa Malaysia, UMW is proposing to undertake the proposed rights issue to primarily repay a bridging facility to finance both the proposed acquisition of: (i) 50.07% stake in MBM Resources Bhd (MBMR) from Med-Bumikar Mara SB and its wholly-owned subsidiary, Central Shore SB for a total cash consideration of RM501m or RM2.56/share, and (ii) remaining 49.93% stake in MBMR at RM499m following the proposed mandatory take-over offer. Specifically, the remaining 49.93% stake in MBMR is to be satisfied via: (i) all cash; or (ii) issuance of new UMW shares at an issue price of RM6.09 per UMW share based on an exchange ratio of 21 new UMW shares for every 50 remaining MBMR shares at an offer price of RM2.56 per MBMR share. The proposed rights issue is expected to be completed by 3Q18. If the MBMR offer is not accepted and/or the proposed MBMR acquisition is not completed, the proposed rights issue will not be implemented.

Indicative rights issue price, number of new rights shares. The proposed rights issue is expected to be completed by the 3Q18. The final quantum of gross proceeds to be raised can only be determined after the closing date of the mandatory general offer. However, for illustrative purposes; (i) under a full cash scenario, assuming a rights issue price of RM4.40 or a 23.7% discount to theoretical ex-right price of RM5.77 (based on the 5-day VWAP of UMW shares up to and including 12 March 2018), the rights issue ratio works out to 1 for 5 UMW shares or issuance of 243.5m rights shares; and (ii) under a full shares scenario, assuming a rights issue price of RM4.30 or a 26.9% discount to theoretical ex-right price of RM5.88 (based on the 5-day VWAP of UMW shares up to and including 12 March 2018), the rights issue ratio works out to 1 for 10 UMW shares or issuance of 130m rights shares.

EPS accretive for both scenarios at 11% and 14% for FY19E. On a fullyear contribution basis in FY19, we expect EPS accretion of 11% (full cash scenario) and 14% (full share scenario), respectively, despite the rights issue for both scenarios. However, due to 6-months contribution in FY18E from MBMR and 10% Perodua, we will see EPS dilution of -5% (full cash scenario) and -3% (full share scenario) for both scenarios.

Impact to financials. For illustrative purposes, as of 31st December 2017, UMW’s debt was at of RM2.6b and gearing of 0.75x. Assuming 100% cash acquisition of MBMR, RM1,072m bridging loan will be taken and 10% Perodua acquisition completed, its debt and gearing are expected to increase to RM3.9b and 0.94x, respectively. Assuming 50.07% cash acquisition, RM559m bridging loan will be taken, 49.93% MBMR share swap and 10% Perodua acquisition completed, its debt and gearing are expected to increase to RM3.5b and 0.73x, respectively. However, with the proposed rights issue, both scenario debt and gearing will normalize at RM3.0b and 0.56x. Nonetheless, we keep our FY18E/FY19E earnings estimates and TP unchanged until completion of the proposed acquisition and pending further announcements (please refer the following page for the earnings/TP sensitivity for the proposed acquisitions).

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 - 14 Mar 2018