The News

• UMW Holdings Bhd (UMW) announced that it will distribute its total outstanding shares in UMW Oil and Gas Corporation Bhd (UMW-OG), representing 55.73% to its existing shareholders.

• The proposed distribution will be done via bonus issuance of an equal number of redeemable preference shares (RFS) on the basis of 1.03 RPS per UMW share.

• The subsequent redemption of all the RPS will be in the form of UMW-OG shares redeemed at redemption price of RM0.90. The premium of the redemption will be redeemed out of UMW’s share premium account.

• After the redemption, UMW’s shareholders will hold UMW-OG shares in proportion to their shareholdings in UMW. Upon completion of this exercise, UMW will cease to be a shareholder of UMW-OG.

• Note that Amanah Saham Bumiputera (ASB) will then hold 45.4% of UMW-OG’s shares, which will trigger a mandatory take-over offer. However, given that this distribution comprises part of a larger consolidation and recapitalisation exercise (please refer to our report today on UMW-OG), ASB will ultimately own 39.7% in UMW-OG.

• The proposals are conditional on the following approvals being obtained 1) UMW shareholders at an EGM, 2) Bank Negara Malaysia for the issuance of the RPS to the non-resident shareholders of UMWH, if required and 3) approvals/consents of any other relevant authorities.

• The EGM will be called in Feb 2017 and the exercise is expected to be completed in April 2017.

Our View

• We are positive on this proposal as UMW-OG has been a drag on earnings since 3Q15. To recap, it registered RM372.9mn cumulative core net loss in the past five quarters. Furthermore, UMW-OG is expected to continue to languish in the red until FY18. Therefore, deconsolidating UMW-OG will likely be earnings accretive and enable UMW to operate on a clean slate. According to our estimates, deconsolidating UMW-OG (Figure 1/2) will increase EPS to 23.6/25.7 sen from 12.4/18.9 sen in FY17/18 respectively.

• Besides that, UMW’s shareholders may be able to unlock profits from the bonus UMW-OG shares as its redemption price of 90 sen is at a slight premium to its last traded price of RM0.88/share.

• Additionally, UMW’s balance sheet will be strengthened as UMW-OG’s 1) debt and 2) negative operating cash flow are deconsolidated. Based on our estimates, UMW’s net gearing will reduce from 0.5x (3Q16) to 0.1x postdeconsolidation (Figure 3).

Impact

• Maintain earnings forecasts pending relevant approvals.

Valuation

• Maintain our TP at RM4.05 based on SOP valuation. Although the deconsolidation will clean UMW’s books and remove a key earnings drag, we believe the sustained weak outlook on the automotive sector remains a key challenge for UMW. In addition, removal of UMW-OG from our SOP valuation will lower our TP to RM3.54. Therefore, in spite of earnings accretion arising from deconsolidation, we maintain our Sell recommendation.

Source: TA Research - 20 Jan 2017