• Potential merger of Sime Darby Motors and UMW Holdings’ auto business reported by The Edge Weekly

• Boost to UMW’s auto business, if it happens

• Impact on earnings depends on mechanics of merger and pricing

• Maintain HOLD and SOP-based TP RM5.30

What’s New

PNB may merge Sime Darby Motors with UMW Holdings’ a uto business. According to The Edge Weekly, Permodalan Nasional (PNB) is looking to merge Sime Darby Motors and UMW Holdings’ auto business,creating a mega motor company under PNB. PNB is the major shareholder of both companies owning 58.2% in UMW Holdings and 51.9% in Sime Darby.

Boost to UMW’s auto business.UMW Holdings currently manufactures and distributes Toyota cars, distributes Lexus cars,and has a 38% stake in Perusahaan Otomobil Kedua (Perodua) under its auto business segment. The auto business is the major revenue contributor (at 77.1% of total revenue or RM8.4bn in FYDec16) to UMW Holdings. As for Sime Darby, Sime Darby Motors currently assembles, imports, distributes and sells luxury auto brands such as BMW, Jaguar, Land Rover and Porsche. It also distributes and sells brands such as Ford and Hyundai. The auto business contributed 43% (RM18.9bn) to Sime Darby’s revenue in FYJune16. Merging these two auto players will see revenue and earnings increase substantially for UMW Holdings given the volume and value that Sime Darby Motors will bring to UMW Holdings. Sime Darby Motors sold 83,060 units in FYJune16 while UMW sold 65,110 units in FYDec16. Besides that, Sime Darby, which is exposed to the luxury car market, has been relatively less affected by the downturn in car sales unlike UMW Holdings’ Toyota, which registered a 32% contraction in car sales in FYDec16.

Earnings impact depends on mechanics of merger and pricing.The potential merger is conceptually positive for UMW Holdings as it would be able to substantially grow its auto business, in our view. This is in line with the group’s strategy to focus on core businesses such as the auto, equipment and manufacturing segments post demerger of the oil and gas business. The exact impact on earnings depends on the merger mechanics and pricing. We maintain our HOLD call on UMW Holdings with a SOP-based RM5.30 TP.

Source: Alliance Research - 13 Mar 2017