• Japanese partners reported to prefer status quo

• Two families agreeable to sale of MBM

• Medbumikar holding out for higher offer

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

Status quo preferred? An article in a local daily today reported that Medbumikar had “sighted” a letter from Perodua’s Japanese shareholders (i.e. Daihatsu Motor Corp/Mitsui) stating that they are not in favour of a single party having a controlling stake in Perodua. Existing shareholders in Perodua has the first right of refusal in the event an existing shareholders intends to sell a stake. However, shareholding for the Malaysian side essentially involves only two shareholders (1) PNB: holds 10% via PNB Equity Resource and another 38% via 58%- subsidiary, UMW Holdings (2) MBM Resources: direct 20% stake and another 5% via 51%-subsidiary Daihatsu Malaysia Sdn Bhd. It is quite difficult to avoid one party essentially having a controlling stake if a sale is to be passed around, essentially, between two parties. We read this as the Japanese partners’ preference for a status quo on the existing shareholding. It is uncertain if UMW has approached Daihatsu Motors and Mitsui to convince these partners on its move to consolidate its position in Perodua, but UMW in its announcements had stated its intention to do so.

Two families agreeable to sale. It was also reported that MARA (the largest shareholder in Medbumikar with a 33% stake) is agreeable to the sale of Medbumikar’s stake in MBM. However, the rest of the shareholding in Medbumikar is split among six families, where two are agreeable to the deal with UMW. Based on the chain of events at MBM in recent years, we note that Looi Kok Loon and Wong Fay Lee (of two different families in Medbumikar) both left MBM within the same year in 2017, suggesting possible conflicts of these two families with Medbumikar shareholders.

Medbumikar rejected initial offer, holds out for more. To recap, Medbumikar has rejected UMW’s inital 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. However, it is reported that Medbumikar is still open to negotiations, provided there is a higher offer.

Recommendation. Re-affirm BUY on UMW (TP: RM7.11/share). Our SOP and forecasts factor in strictly, only the 10% Perodua stake acquisition from PNB Equity Resource as this looks like the only firm deal at this point. There is further potential upside if Medbumikar eventually accepts the offer and UMW proceeds with its takeover of MBM, (depending on the offer price and how it is financed) though obviously, there is no certainty yet of this at this juncture.

Source: MIDF Research - 11 Apr 2018