This article first appeared in The Edge Financial Daily on April 12, 2018
UMW Holdings Bhd
(Feb 11, RM6.18)
Maintain buy with an unchanged target price (TP) of RM7.11: Medbumikar had reportedly “sighted” a letter from Perodua’s Japanese shareholders (that is Daihatsu Motor Corp and Mitsui) stating that they are not in favour of a single party having a controlling stake in Perodua. Existing shareholders in Perodua have the first right of refusal in the event existing shareholders intend to sell a stake.
However, shareholding for the Malaysian side essentially involves PNB holding 10% via PNB Equity Resource and another 38% via 58% subsidiary, UMW Holdings (UWM); and MBM Resources’s (MBM) direct 20% stake and another 5% via 51% subsidiary Daihatsu Malaysia Sdn Bhd. It is quite difficult to avoid one party essentially having a controlling stake if a sale is to be passed around, essentially, between two parties. We read this as the Japanese partners’ preference for a status quo on the existing shareholding. It is uncertain if UMW has approached Daihatsu Motors and Mitsui to convince these partners on its move to consolidate its position in Perodua, but UMW in its announcements had stated its intention to do so.
It was also reported that Mara (the largest shareholder in Medbumikar with a 33% stake) is agreeable to the sale of Medbumikar’s stake in MBM. However, the rest of the shareholding in Medbumikar is split among six families, where two are agreeable to the deal with UMW. Based on the chain of events at MBM in recent years, we note that Looi Kok Loon and Wong Fay Lee (of two different families in Medbumikar) both left MBM within the same year in 2017, suggesting possible conflicts of these two families with Medbumikar shareholders.
To recap, Medbumikar has rejected UMW’s inital offer to take out its 50.07% block in MBM Resources. Poor valuations for the offer could have been the main stumbling block, going by consensus reaction to the deal when it was announced. To recap, the RM2.56 per share offer valued MBM at just eight times financial year 2019 earnings, 30% discount to book value and is 17% below our top-end of consensus TP of RM3.10 per share.
However, it is reported that Medbumikar is still open to negotiations, provided there is a higher offer.
Reaffirm “buy” on UMW (TP: RM7.11 per share). Our sum-of-parts and forecasts factor in strictly only the 10% Perodua stake acquisition from PNB Equity Resource as this looks like the only firm deal at this point. There is further potential upside if Medbumikar eventually accepts the offer and UMW proceeds with its takeover of MBM, (depending on the offer price and how it is financed) though obviously, there is no certainty yet of this at this juncture. — MIDF Research, April 11