Higher earnings for UMW Holdings despite jitters over cash call

MBM Resources and Perodua deal will boost UMW Holdings future earnings


UMW Holdings Bhd’s share price lost 59 sen of its value yesterday as investors scurried over the proposed RM1.1 billion rights issue exercise to fund the takeover of MBM Resources Bhd.

At the end of yesterday’s trading, shares in the Permodalan Nasional Bhd (PNB)-controlled group dropped 9.09% to close at RM5.90, valuing the conglomerate at RM8.9 billion.

Investors are jittery over the massive cash call by UMW Holdings to fund the privatisation of MBM Resources and to increase its grip in the country’s leading carmaker Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

UMW Holdings had proposed to acquire a 50.07% stake in MBM Resources from Med-Bumikar Mara Sdn Bhd for cash consideration of RM501 million (RM2.56 per share).

The proposed rights issue is to repay a bridging facility to be obtained by the group to acquire the 50.07% interest in MBM Resources and the cost for the mandatory takeover offer for the rest of the shares.

UMW Holdings’ corporate exercise, valued over RM1 billion, will give the complomerate control of MBM Resources which also holds almost 23% interest in Perodua.

UMW Holdings is also acquiring a 10% stake in Perodua from PNB Equity Resource Corp Sdn Bhd for RM417.5 million, which will be satisfied by the issuance of new UMW Holdings shares and RM117.5 million cash.

If the deal goes through, UMW Holdings’ interest in Perodua could increase from 38% to 70.6%, according to reports.

Analysts see the share price slump as a temporary setback, and the negative reaction to the proposed cash call would be short-term.

MIDF Research analyst Hafriz Hezry said the share price drop was expected, but the entire proposed deal is positive for UMW Holdings.

“It is actually an opportunity for investors to buy into UMW Holdings as the deal is a potentially cheap entry into MBM Resources at just eight times of its finanical year 2019 priceearnings (PE) and effective 6% to 7% dividend yields obtained from Perodua at the entry price,” Hafriz said in a report yesterday.

Analysts said the controlling stake in Perodua would not only boost UMW Holdings’ position in the country’s automotive market, but the earnings increase from the acquisitions would offset any dilution from new shares issuance.

Hafriz said in a worst case situation under a full cash payment scenario, UMW Holdings still attains earnings accretion of 4% for its FY19 ending Dec 31.

“It could see earnings accretion rising to 6% for FY19 in a best case, full shares scenario,” he said in the report.

Hong Leong Investment Bank Bhd research analyst Daniel Wong said the acquisition will translate UMW Holdings’ 2018-19 PE of nine times to 11 times and price-to-book ratio of 0.7 time to one time.

That would be compared to UMW Holdings’ own valuation of 2018 PE of 23.1 times, 2019 PE of 16.5 times and price-to-book of 2.5 times.

“Based on a worst case scenario (full cash), UMW Holdings shall raise RM1.1 billion, which shall be funded through rights issue of UMW’s 243.5 million shares (based on RM4.40 per share and one for every five UMW’s shares).

“UMW’s book per share will rise from RM2.64 per share (based on December 2017) to RM3.30 per share and net gearing shall improve from 51.6% to 33.6%,” Wong said.

RHB Research Institute Sdn Bhd said UMW Holdings and MBM Resources are a good fit as the latter’s Daihatsu and Hino distribution franchises would broaden UMW Holdings commercial vehicle offerings.

“We do not expect any objections from UMW Holdings’ key principal, Toyota, given that Daihatsu and Hino are already key companies within the Toyota Motor Group,” said the research house.

RHB Research also said MBM Resources’ autoparts business would fit in seamlessly with UMW’s manufacturing and engineering division.

JF Apex Securities Bhd said the offer price for MBM Resources stake was reasonable.

“The offer price is fair as it implies forward PE of 10.04 times, which is in line with the valuation of other smallcap stocks of eight times to 10 times, and on par with consensus target price of RM2.59,” it said, adding that the new ownership structure could also offer more supply contract opportunities for MBM Resources’ troubled alloy wheel manufacturing business.

Meanwhile, MIDF affirmed a ‘Buy’ call at a higher sum-of-parts derived target price of RM7.11 from UMW Holdings.

Perodua, which has recorded a net profit of well over RM400 million each year since 2012, had a 40% share of all new vehicles sold in January this year.

Most recently, Perodua has to date delivered 28,000 Myvis, on the back of the 60,000 orders collected so far.

On a year-on-year basis, Perodua’s sales performance improved by 13.1% to 34,800 units against 30,800 vehicles sold in the first two months of 2017.

“This would strengthen UMW Holdings’ position in the local automotive market,” Affin Hwang Investment Bank Bhd said.