• MBM acquisition to be fully financed by new UMW shares

• Gives MBM minorities cash and share swap options

• Earnings accretive despite fully new share-funded acquisition

• Re-affirm BUY at higher TP of RM7.11

MBM’s minorities offered option. In a follow-up to its acquisition proposals last Friday, UMW announced that if it proceeds with the MGO for MBM’s minorities, the latter will be offered 2 options: (1) Cash at RM2.56/share – similar to offer for Medbumikar buyout (2) Share swap for UMW shares fixed at RM6.09/share.

Financing MBM acquisition entirely via new shares. UMW is planning to issue new shares worth up to RM1.1b to finance the acquisition of up to 100% of MBM. UMW has to resort to a rights issue , in our opinion, as the majority of gross cash of RM1b at UMW group sits at 51% owned UMW Toyota. The extent of dilution will depend on: (1) The number of MBM minorities taking up the cash offer (2) The prevailing price of UMW preceding price fixing date.

Less dilutive in full shares scenario. Basically, the exercise will be less dilutive to UMW if MBM’s minorities opt for the share swap option. This is because pricing of UMW shares in the share swap is fixed higher at RM6.09/share, whereas a cash payment to MBM’s minority will be financed via cash call to existing UMW shareholders at 20%-30% discount to Theoretical Ex-Rights Price (TERP) of UMW shares based on 5-day VWAP preceding a price fixing date to be determined in due course. To give an illustration, this would work out to around RM4.30- RM4.40/share.

Earnings accretive despite fully new share-funded acquisition. Nonetheless, earning expansion from the acquisitions will more than offset any dilution from potential new share issuance to fund the acquisitions. Our sensitivity analysis suggests in a worst case, full cash payment scenario, UMW still attains earnings accretion of 4% (FY19F), whereas in a best case, full shares scenario, net earnings accretion rises to 6% (FY19F). This situation is possible given the large deviation in valuation between UMW (14x FY19F PE) vs. the offer for MBM at just 8x FY19F PE.

Reaffirm BUY. While we expect initial share price pressure given a potential cash call to fund the acquisitions, we suggest investors buy into UMW as this would be a good deal if it is successful given UMW’s potentially cheap entry into MBM at just 8x FY19F earnings and effective 6%-7% dividend yields attained from Perodua at the entry price. Reaffirm BUY at higher SOP-derived TP of RM7.11 (from RM6.70) as we factor in strictly, only the 10% Perodua stake acquisition from PNB Equity Resource as this is the only firm deal at this point. We also now breakdown valuations between UMW Toyota and Perodua in our new SOP valuation. There is further significant upside if Medbumikar accepts the offer and UMW proceeds with its takeover of MBM.

Source: MIDF Research - 14 Mar 2018