UMW has been notified by Med-Bumikar and its subsidiary, CSSB, that they have rejected the takeover offer made by UMW for the acquisition of their collective 50.07% equity interest in MBMR. UMW deemed the offer still reasonable and extended the offer period for which the MBMR offer shall continue to be valid, from 28th March 2018 to 30th April 2018. Maintain MP with an unchanged TP of RM6.25.

UMW still not giving up on pursuing controlling stake in Perodua. UMW deemed the offer still reasonable and notified its decision to extend the period for which the MBMR offer shall continue to be valid, from 28th March 2018 to 30th April 2018. UMW intends to continue to engage Med-Bumikar, CSSB, their respective shareholders and key principals, being the brand owners of the distributorship marques, on the merits of the proposed MBMR acquisition for their further consideration.

Recall, UMW unlikely to raise offer price for MBM Resources. 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 recent company 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. Interdependently, UMW has also proposed to acquire a 10% stake in Perodua from PNB Equity Resource Corporation Sdn Bhd (PERC). 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 31st 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 nonnational car segment via the Toyota marque as well as benefiting from economies of scale and creating synergies.

Keeping our FY18E/FY19E earnings unchanged. Nonetheless, we keep our FY18E/FY19E earnings and TP unchanged at RM6.25 pending further announcements. Our current TP is based on 20x FY18E EPS implying +1.0SD on 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 - 27 Mar 2018