• Possible disappointment in MBM takeover deal

• Deal asides, Toyota TIV to hit major inflection point FY19F

• Via current 38% stake in Perodua, UMW also rides on national car offensive next year

• Maintain BUY, but TP of RM7.11 under review

Possible disappointment in UMW-MBM deal. The offer to buyout MBM’s major shareholder is expected to lapse today. While it would have been an opportunity for MBM’s minority shareholders to exit a valuetrap, unfortunately, we gather that Med-Bumikar has not responded to the offer. This also means UMW’s shareholding in Perodua will remain status quo at 38%. We also think UMW is unlikely to go through with its planned purchase of another 10% Perodua stake from PNB, if the deal to buyout MBM falls through. The deal was merely an icing to our previously, contrarian BUY, and the sharp price retracement in the past 1 month more than reflects the deal falling through, we think. Similarly, MBM’s share price has retraced sharply to just ~RM2 in the past month.

Hitting a major inflection point. Fundamentally, we expect Toyota market share to hit a major inflection point in FY19F as the new Bukit Raja plant comes on-stream from 1Q19. We forecast Toyota TIV to rise 13%yoy to 81K in FY19F and market share to expand to close to 14% from 12% in FY18F. This is expected to be driven by the new Vios and more importantly, the all-new Yaris (Honda Jazz competitor) which fills a major gap in UMWT’s model mix. Toyota TIV should rise further to ~90K in FY20F. UMWT is targeting to regain pole position in the non-national segment over the mid-term.

New Rush locally assembled. Unlike the previous generation Rush which was brought in as CBU, the latest version is locally assembled, contract manufactured by Perodua. While pricing is more or less maintained, the new Rush is sold at high spec (Toyota active safety features, 7 airbags). UMWT is targeting 3000-4000 annual sales volume, 4%-5% of our FY19F Toyota TIV.

Rides on national car offensive. Both Proton and Perodua will be launching their respective SUVs within the next 2-8 months. These are important models that fill up gaps in their respective model mix. UMW is one of the major beneficiaries being the largest shareholder in Perodua with a 38% stake. Our FY19F 10% earnings growth for Perodua has yet to factor in the new SUV, which could drive a gap-up in market share. For now, we forecast conservative flattish market share in FY19F.

Recommendation. Maintain BUY on UMW but our TP of RM7.11/share is Under Review. Key catalysts: (1) A deleveraged balance sheet post UMWOG demerger allows room for acquisitive growth and possible resumption of dividend payouts, (2) Reversal of prior years’ market share loss, structural cost reduction and pricing advantage from UMW Toyota’s EEV-focused strategy (3) Redevelopment of UMW’s 830 acres Serendah land which will unlock value of the asset – easily worth 40sen/share on our estimates (4) A more than quadrupling of M&E division earnings once its aerospace division reaches full scale production.

Source: MIDF Research - 31 Oct 2018