We attended UMW’s investment community briefing with our neutral view unchanged pending full completion of proposed acquisitions and further announcements. The briefing was presented by UMW PGCEO, Mr. Badrul Feisal, and well-attended by c.50 analysts and fund managers. UMW believes that a higher offer price for MBMR is highly unlikely as the offer price at RM2.56/MBMR share is considered fair at acquisition PER of 10.7x (based on MBMR FY17 EPS), and at a premium of 7% to our 10x FY18E EPS. Maintain MP with an unchanged TP of RM6.25.

UMW believes a higher offer price is highly unlikely. Recall, UMW is proposing to undertake a rights issue to primarily repay a bridging facility to finance the proposed MBMR acquisition. Interdependently, UMW has also proposed to acquire a 10% stake in Perodua from PNB Equity Resource Corporation Sdn Bhd (PERC). UMW believes that the current deal is fair and the potential cross synergies with the larger group from the proposed acquisitions will lead to possible cost savings from economies of scale. Key takeaways from the briefing are:- (i) upon completion of the transactions, UMW will continue to evaluate MBMR’s strategic options for better growth in the group businesses and to enhance shareholder value, (ii) UMW believes that the offer price is fair at RM2.56/MBMR share at acquisition PER of 10.7x (based on MBMR’s FY17 EPS), and at a premium of 7% to our 10x FY18E EPS, and (iii) on a full-year contribution basis from MBMR and Perodua, there will be EPS accretion under both scenarios (full-cash scenario and full-shares scenario), despite the rights issue. All in, we believe minorities who wish to enjoy a larger Perodua earnings base should choose share swap offer as we believe that UMW will have the largest market share exposure to Malaysian automotive industry post acquisitions. (Toyota’s market share of 12% plus Perodua’s market share of 35% totalled 47% market share, as of 31

st December 2017)

Rationale and benefits of the proposed acquisitions. UMW’s rationales behind the proposed acquisitions are to; (i) increase strategic stake in Perodua with an increased effective stake from 38.0% to 70.6% after completion of the proposed MBMR acquisition and assuming full acceptance of the proposed mandatory offer, and the completion of the proposed Perodua acquisition, (ii) increase exposure in the commercial vehicle segment by assimilating MBMR’s multi-brand dealerships (i.e. Daihatsu and Hino vehicles) into the current UMW Toyota commercial marques, (iii) widen UMW’s offerings in the manufacturing segment with MBMR’s auto parts manufacturing business (wheel manufacturing, safety products and noise, vibration and harshness products), and (iv) improve prospects in the automotive segment by leveraging on Perodua’s strength in the national car segment, coupled with the company’s existing presence in the non- national car segment via the Toyota marque as well as benefiting from economies of scale and creating synergies.

EPS accretive for both scenarios at 11% and 14% for FY19E. On a full-year contribution basis in FY19, we expect EPS accretion of 11% (full-cash scenario) and 14% (full-shares scenario), respectively, despite the rights issue for both scenarios.

Unchanged for now. Nonetheless, we keep our FY18E/FY19E earnings estimates and TP unchanged at RM6.25 until completion of the proposed acquisition and pending further announcements. Our current TP is based on 20x FY18E EPS implying +1.0 SD of its 5-year mean historical PER. Maintain MARKET PERFORM.

Risks to our call include: (i) higher-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 20 Mar 2018