• Offers to buyout MBM and acquire Perodua stake from PNB

• Good deal for UMW if accepted given relatively cheap offer

• Net earnings accretion despite possible cash call for funding

• Upgrade to non-consensus BUY at unchanged TP of RM6.70

Consolidating position in Perodua. UMW made two noninterconditional deals last Friday: (1) UMW has put in an offer to buyout MED-Bumikar-MARA’s (Medbumikar) controlling 50.07% stake in MBM Resources (MBM) for RM501m, valuing the group at RM2.56/share via cash consideration. MBM controls an effective 22.6% stake in Perodua. If Medbumikar accepts the offer, UMW will then do a mandatory offer to take out MBM’s minority shareholders and take MBM private. (2) Acquisition of PNB Equity Resource’s (PNB) 10% stake in Perodua for RM418m via a combination of RM118m cash and RM300m share swap valuing UMW at RM6.09/share - UMW will issue new shares amounting to 49.3m (4% of UMW’s current share cap) to PNB. UMW currently holds a 38% stake in Perodua. The offer for MBM is subject to Medbumikar accepting the offer before 28th March.

Good deal for UMW if accepted. The offer of RN2.56/share for MBM 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. Almost similarly, the offer to buyout PNB’s 10% stake in Perodua values the stake at just 8.6x FY19F earnings.

Net earnings accretion despite possible cash call. To fund the MBM acquisition which may rise to RM1b if the mandatory takeover offer is taken up by minorities, we think UMW may have to resort to a right issue. Nonetheless, earning expansion from the acquisitions will more than offset any dilution from potential new share issuance to fund the acquisitions. Assuming the MBM acquisition is fully funded by a cash call at RM6.09/share (similar to the RM6.09 pricing of share swap for acquisition of 10% Perodua stake from PNB), we estimate a total share base expansion of 18%, which is much smaller compared to gross earnings expansion 39%/28% for FY18F/19F from the acquisitions.

Upgrade to non-consensus BUY. While we expect initial share price pressure given a potential cash call to partially fund the acquisition, we suggest investors buy into UMW as this would be a good deal if it is successful. Moreover, UMW’s share price has retraced meaningfully since our recent downgrade. We raise UMW to BUY at unchanged SOP-derived TP of RM6.70/share with potential upside on the back of meaningful value and earnings accretion from the acquisitions, if successful. We estimate a 5% (FY19F) net earnings accretion from the 10% Perodua stake acquisition and this could expand by another 5% if the MBM acquisition is successful.

Source: MIDF Research - 12 Mar 2018