What’s the News?

Sime Darby Bhd (SIME) announced that the group has entered into a conditional sale and purchase agreement (SPA) with Permodalan Nasional Berhad (PNB) to acquire PNB’s 61.2% stake in UMW Holdings Berhad (UMW) for a cash consideration of RM3.57bn or RM5.00/share. The proposed acquisition is subject to regulatory and shareholders’ approval.

More Details

If the acquisition goes through, SIME is obliged to extend a mandatory general offer (MGO) to acquire the remaining UMW shares at RM5.00/share. According to SIME, the proposed acquisition is expected to be completed by 4QCY23 and followed by the completion of the proposed MGO by 1QCY24.

Our view

We are not surprised by the news as the market has been talking about the merger and acquisition (M&A) of SIME and UMW since 2017. Following the exercise, SIME will emerge as the largest shareholder of UMW. A quick check from the Bursa announcement, Employees Provident Fund (EPF) and Kumpulan Wang Persaraan (Diperbadankan) (KWAP) are the other two major shareholders in UMW with 7.6% and 9.1% stakes, respectively.

According to SIME, the merger with UMW will further scale up and strengthen its presence in the Malaysian automotive sector as Perodua and Toyota conquer more than 50% of the total TIV market share. UMW currently holds 51% stake in UMW Toyota Motor as well as 38% stake in Perodua. Besides, the merger will also broaden SIME’s product offerings with widely popular mass market brands and creates exposure to high-growth Material Handling business.

Having said that, we believe the acquisition may face some hurdles given the complexity of the automotive ecosystem. Besides, we see some brand cannibalisation, especially in the industrial division where SIME is the exclusive Caterpillar dealership in some regions, while UMW has a strategic partnership via a JV with Komatsu. On top of it, as there are too many principals and partners from both parties, the acquisition may face some hurdles from multiple third-party advisors and create disruptions for both SIME and UMW.

A Premium Deal

According to announcement, the offer price of RM5.00/share implies an acquisition PER of 14.1x, based on UMW’s FY22 reported earnings. Based on our FY23 earnings forecast of RM378.9mn, the PER would work out to 15.4x. This is on the high side of the comparable peers’ PER and also higher than our UMW’s target price implied PER of 13.7x. In terms of P/B, the offer price implies a P/B of 1.3x.

SIME had a RM3.1bn cash pile and its net gearing stood at 0.31x as of 30 June 2023. Assuming SIME manages to acquire a 100% controlling stake in UMW, a quick back-of-theenvelope calculation indicates that the acquisition will enhance SIME’s FY24 and FY25 earnings by 6% to 7% after factoring in the assumption of finance costs based on 90% debt financing and 10% from internal funds. According to management, SIME’s net gearing will also expand to about 0.8x post-acquisition of UMW and Cavpower (announced recently). Having said that, SIME intends to bring down the gearing to 0.6x after 18 months, via land disposal in Labu and the JV healthcare division (50% stake).

Valuation

No change to our earnings estimates, pending finalisation of the deal. Having said that, our target price for UMW is now benchmarked to the offer price of RM5.00/share (previously RM4.22). We advise UMW shareholders to accept the offer. Meanwhile, we maintain a BUY on SIME with a TP of RM2.50/share, based on a sum-of-parts (SOP) valuation, pending conclusion of the deal.

Source: TA Research - 25 Aug 2023