• Demerger to complete by end-July

• Shareholders on track to realise one-off “dividend”

• 2-3 months lag between share distribution and UMWOG cash call

• Reaffirm BUY at unchanged TP of RM6.50/share

Demerger on track. UMW’s shareholders have approved the proposal to demerge UMWOG at an EGM recently. The demerger exercise which will be done via the redistribution of shares owned by UMW in UMWOG directly to UMW’s shareholders is scheduled to be completed by end July 2017. The redistribution will be done on a ratio of 1.03 UMWOG shares for every 1 UMW share held at an ex-date to be determined later.

Ample time to realise “dividends”. Our recent checks suggest that there will be circa 2-3 months gap between completion of UMW’s share redistribution and the planned RM1.8b rights issue by UMWOG. This gives ample time for UMW’s shareholders (which will be landed with free UMWOG shares) to sell in the market, if the intention is not to participate in UMWOG. At current UMWOG market price, UMW shareholders will get to realise essentially a cash dividend of ~RM0.62/share, which translates into a very attractive yield of 11%. Notably, the current market price is still higher than UMW’s entry cost of RM0.58/share.

To reap the benefits. To recap, fundamentally, the demerger will bring significant, structural positives to UMW: (1) Elimination of UMWOG’s ~RM660m annual net loss (2) Balance sheet deleveraging to a net gearing of ~20% given the elimination of UMWOG’s massive debt (3) Ring-fences UMW from further cash leakage into UMWOG, especially given the latter’s upcoming RM1.8b rights issue.

Reaffirm contrarian BUY on UMW at unchanged TP of RM6.50/share. (1) Demerger of O&G units will deleverage balance sheet, drive earnings turnaround and allow better focus on core divisions (2) Reversal of prior years’ market share loss given UMW Toyota’s renewed focus on EEV models which will drive structural cost reduction and price advantage (3) More than quadrupling of M&E division earnings once its aerospace division reaches full scale production (4) UMW is underowned and at just 12x FY18F earnings, trades below its historical average PER of 13.5x

Source: MIDF Research - 18 May 2017