SIME is extending a Mandatory General Offer (MGO) for UMW shares at RM5.00 per piece, following its proposed acquisition of a 61.18% stake in UMW from Permodalan Nasional Berhad (PNB) and Amanahraya Trustees Berhad (ART) for RM3,574m or RM5.00 per share in cash. We recommend ACCEPT OFFER as we believe the MGO price is a good exit price for minority shareholders.

SIME takes over UMW. SIME (OP; TP: RM2.40) has proposed to acquire 61.18% stake of UMW from PNB and ART for RM3,574m or RM5.00 per share cash (8% premium to the last traded price of RM4.62). In accordance with the Malaysian Code on Take-overs and Mergers, SIME will undertake a mandatory general offer (MGO) for the remaining shares it does not own in UMW Holdings Berhad from minority shareholders at RM5.00 per share in cash as well, valuing the whole deal at RM5,841.5m. SIME does not intend to maintain the listing status of UMW. The proposed acquisition and MGO is expected to be completed by 4QCY23 and 1QCY24, respectively.

Acquisition PER of 13.2x and PBV of 1.2x. We believe the MGO price of RM5.00 per share is a good exit price for minority shareholders. Based on UMW’s FY24F core net profit of RM442.4m, the proposed PER and PBV acquisition works out to 13.2x and 1.2x, respectively. These are at premium valuations to passenger automobile peers’ average PER of 11x and PBV of 1.0x. This deal offers shareholders a chance to exit UMW as the major shift towards electric vehicle (EV) space could spark a price war which could affect its margin in the longer term, taking note from the current challenging operating environment in China. Furthermore, UMW Toyota and Perodua do not have affordable EV offerings to challenge the influx of China EV cars as well as the EV leader, Tesla. Hence, we recommend shareholders to take up the offer.

Accept offer of RM5.00 per share. On the back of the MGO price of RM5.00 per share, we rationalise our TP by 4% to RM5.00 from RM4.80 There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). We also rationalise our call to ACCEPT OFFER from OUTPERFORM.

We like UMW for: (i) the mass-market marques under its automotive business, i.e. Toyota and Perodua, but not without high-margin models such as Toyota Vios and Perodua Alza, (ii) the strong earnings visibility at its automotive business backed by order backlogs of >240k units of vehicles, and (iii) it being a reopening play, given the pick-up seen in its heavy and industrial equipment business and manufacturing of aero engine fan cases. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) failure of the proposed privatisation of UMW which could spark sell-down in its share price, (ii) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (iii) supply chain disruptions, (iv) escalating input costs, and (v) a global recession hurting demand for industrial/heavy equipment.

Source: Kenanga Research - 25 Aug 2023