• Medbumikar rejects offer, but deal with PNB still on

• Offer period for Medbumikar extended to 30th April

• Upside to offer a possible scenario

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

Medbumikar rejects offer. Medbumikar has rejected UMW’s offer to take out its 50.07% block in MBM Resources (MBM). Poor valuations for the offer could have been the main stumbling block, going by consensus reaction on the deal when it was announced. To recap, the RM2.56/share offer valued MBM at just 8x FY19F earnings, 30% discount to book value and is 17% below our top-end of consensus TP of RM3.10/share.

Acceptance period extended, possible upside? The decision to reject UMW’s offer came two days before the lapse of the offer on 28th March 2018. However, UMW has decided to extend the offer’s acceptance period up till 30th April. It intends to engage Medbumikar to convince the latter of the merits of its offer. Reading between the lines, we see UMW’s decision to extend the offer period as a serious intention to buyout Medbumikar and would not rule out some sort of revision to its original offer. However, assuming UMW sticks with a fully new sharefunded acquisition, we see only between 4%-6% possible upside to its offer before the deal turns earnings dilutive – this is based on our initial estimates on the deal’s earnings accretion based on its planned financing strcuture. There is further possible upaside if UMW turns to partial debt financing to fund the deal. We would bear in mind that UMW had recently setup a RM2b perpetual Sukuk program.

Take it with a pinch of salt. When asked in a recent briefing, UMW’s management indicated it does not intend to budge on its offer price, or at least this is what management is trying to sound out. As the dealmaker, UMW naturally will not put out the highest offer the first round neither would it divulge its intention to raise its offer. Having said that, UMW has an advantage given that: (1) It is an existing partner in Perodua, which would have the first right of refusal if a 3rd party offers to buy out a stake in Perodua from any of the existing shareholders, (2) A 3rd party acquisition is not entirely a straightforward process as existing Japanese partners in Perodua also has to agree if a new shareholder is to come into Perodua given the eventual business partnership, and (3) There is actually a scarcity of buyers given that this involves a stake in the national carmaker which is of strategic importance to the nation; a potential buyer requires the necessary “political clout” and “financial clout”.

Deal with PNB still on. The MBM deal is not inter-conditional with the deal to acquire a 10% Perodua stake from PNB. This has already been reflected in our forecasts and valuations. In fact, the RM418m deal with PNB values the 10% Perodua stake at just 8.6x FY19F and is only partly funded by share swap i.e. RM118m cash and RM300m via share swap valuing UMW at RM6.09/share. This deal alone enhanced our FY19F EPS by 4% post dilutive impact of share swap.

Source: MIDF Research - 27 Mar 2018