• Still NEUTRAL, with new TP of MYR5 from MYR3.80, 8% upside and 3% FY24F yield. Sime Darby (SIME MK, BUY, TP: MYR2.50) proposed to acquire Permodalan Nasional's (PNB) 61.18% UMW stake for MYR3.57bn (MYR5 per share), implying 14.4x FY24F (Dec) P/E. The potential acquisition could trigger a mandatory general offer (MGO). Given the favourable valuation and exit opportunity ahead of softer 2024 car sales, we are positive on the deal (from UMW’s shareholders point of view), and recommend the UMW shareholders to accept the potential MGO.

• MYR5 price implies 13.6x FY24F (Jun) earnings. Based on our current UMW Dec-year-end earnings estimates, we forecast UMW’s profit during the 12 months ended June-2024 to be c.MYR430m. SIME's MYR5 offer implies a FY24F (Jun) P/E of 13.6x (refer Figure 1).

• Rationale for the acquisition. We think the acquisition is largely orchestrated by PNB, which is a 50.3% and 61.18% shareholder of SIME and UMW. Nevertheless, SIME's management believes that its acquisition of UMW would allow it to diversify into the automotive mass market, and have a more balanced revenue exposure between Malaysia, China, and Australasia. Beyond achieving a large combined Malaysian automotive market share (57% as of 7M23), we see little revenue and cost synergies from this acquisition.

• Potential hurdles. Neither SIME nor UMW have engaged their principals on the potential transaction. Aside from shareholders, the principals' view on the transaction could make or break the deal, which involves competing brands (eg Caterpillar and Komatsu).

• Post proposal, we maintain our earnings estimates as the proposed acquisition does not impact UMW's earnings.

• We raise our TP to MYR5 to match SIME's offer price, from the previous MYR3.80 (based on 11x FY24F P/E). The MYR5 TP includes 0% ESG adjustments. The MYR5 implies 14.4x FY24F (Dec) earnings, which we think is favourable relative to its 5-year historical average of c.13x and to our previously-ascribed 11x. Hence, we recommend UMW’s shareholders to accept the potential MGO.

• Still NEUTRAL. Though we are positive on the acquisition (for UMW's shareholders), the recent run up in share price has left little upside. M&A aside, we are expecting Toyota and Perodua sales to soften in 2024, weighing on FY24F's earnings. We note that if the deal fails to materialise, there is downside risk to UMW’s current price.

• Key downside risks include softer-than-expected orders and deliveries, worse-than-expected FX movements, and higher-than-expected costs. The opposite represents upside risks.

Source: RHB Securities Research - 25 Aug 2023