INVESTMENT HIGHLIGHT

• UMW offers to buyout Medbumikar’s 50.1% stake in MBM

• Less-than-attractive offer but not ruling out Medbumikar’s acceptance

• Deep value thesis underpinned

• Maintain BUY at higher TP of RM3.10

What’s new. MBM’s major shareholder MED-Bumikar-MARA (Medbumikar) has received an offer from UMW to buyout its 50.07% stake in MBM Resources (MBM) for RM501m cash, valuing MBM at RM2.56/share (and the entire MBM at a market cap of RM1b). If Medbumikar accepts this offer, UMW will have to extend a mandatory offer for the rest of MBM’s minority shareholders and take MBM private.

Less-than-attractive offer. The offer of RN2.56/share values MBM at just 8x FY19F earnings - below our revised SOP-based valuation of RM3.10/share (which rolls over valuations to FY19F). UMW’s offer is also at a steep 30% discount to FY17A BV of RM3.68/share and on our estimates, effectively values MBM’s 22.6% stake in Perodua at just 8x FY19F earnings. However, “qualitative” factors beyond mere valuations may drive Medbumikar’s board to accept the offer. After all, the block is of a strategic national asset (2nd national car) and only a limited number of potential acquirers would naturally qualify. Secondly, “factors” within Medbumikar itself could entice its shareholders to liquidate Medbumikar’s position in MBM. Moreover, Medbumikar was one of the original shareholders in Perodua; with Perodua having paid historical 50% payout as dividends in the past, these shareholders would have well broken even on their initial investment, we think. Our checks suggest Medbumikar is 30% owned by MARA with the rest controlled by the founding family members.

Should minorities accept the offer? We think the deal is cheap for UMW to obtain a controlling stake in Perodua and is unlikely to appear enticing enough for MBM’s minorities to accept. In the case that minority shareholders reject the eventual mandatory offer, things would likely remain status quo for the minorities other than having a new majority shareholder running the show at MBM. On the flip side, existing investors in MBM could accept UMW’s offer and instead build up a larger position in UMW which clearly benefits if the deal goes through.

Recommendation. Re-affirm BUY on MBM at a higher SOP-derived TP of RM3.10 (from RM2.45) after rolling over our valuations to FY19F. The offer allows MBM to realise better value of its assets and underpins our thesis (refer to initiation dated 16th Nov 2017) of the deep value in MBM’s Perodua stake which positions it as a prime acquisition target.

Source: MIDF Research - 12 Mar 2018