Cover Story: Second cash call for PNB in two years?

This article first appeared in The Edge Malaysia Weekly, on March 19, 2018 - March 25, 2018.
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THE market clearly likes the idea of UMW Holdings Bhd taking majority control of Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

UMW’s stock rose 9.07% over two trading days after its offer to Med-Bumikar Mara Sdn Bhd was announced on March 9. It closed at RM6.49 last Tuesday even though there was no certainty that the offer would be accepted.

But the market clearly does not like how the group wants to fund the proposed acquisition.

Last Tuesday evening, UMW announced a proposed cash call to raise up to RM1.1 billion. The next day, its stock plunged 9.09%, wiping out the earlier gains. It had recovered somewhat by Friday, closing at RM6.31 for a net gain of 6.05% over five trading days.

UMW president and group CEO Badrul Feisal Abdul Rahim concedes that the sharp drop was due to the announcement on the cash call.

He acknowledges that the group could have proceeded without asking shareholders to fund the proposed acquisition. According to UMW’s latest financial statement, its net gearing stands at 0.38 times while it has RM1.16 billion cash.

“Of course, we could have done that, but I think this (the cash call) is actually the best for the company,” says Badrul in an exclusive interview.

To recap, UMW said on March 9 that it had made an offer to acquire Med-Bumikar Mara Sdn Bhd’s entire 50.7% stake in Bursa Malaysia-listed MBM Resources Bhd.

In the same announcement, it said it had also offered RM417.5 million to PNB Equity Resource Corp Sdn Bhd for the latter’s 10% stake in Perodua.

PNB Equity Resource is wholly owned by UMW’s majority shareholder, Permodalan Nasional Bhd (PNB).

MBM has 22.58% equity interest in Perodua while UMW has 38%. If Med-Bumikar accepts the offer, UMW would effectively gain majority control of Perodua, enabling it to consolidate the latter’s earnings and boost its own income, say analysts.

In its financial year ended Dec 31, 2016, Perodua recorded a net profit of RM463.59 million on sales of RM9.05 billion and paid out to shareholders RM205.94 million in dividends, according to publicly available data.

At RM2.56 per share, UMW’s offer values Med-Bumikar’s stake in MBM at RM501 million. The offer stands until 5pm on March 28.

Should Med-Bumikar accept, UMW intends to privatise MBM, offering the remaining shareholders a choice of RM2.56 cash per share or swapping for UMW shares pegged at RM6.09 each.

It is worth noting that if Med-Bumikar accepts UMW’s offer, this may see PNB forking out for the second major cash call in two years for a strategic investee company.

Last year, as loss-making oil rig player UMW Oil & Gas Corp Bhd (UMWOG) was being demerged from UMW, PNB backed a RM1.8 billion rights issue to recapitalise UMWOG.

The demerger was completed in July. The cash call followed a failed proposal to merge UMWOG with Icon Offshore Bhd and Orkim Sdn Bhd.

If MBM’s minorities opt for a full-cash scenario, UMW hopes to raise RM1.07 billion from the rights issue to privatise MBM. It said it intends to procure an irrevocable written undertaking from PNB to subscribe for its entitlement.

Details such as entitlement basis and issue price have not been determined at this point as the exercise is dependent on whether Med-Bumikar accepts the offer for its 50.7% stake.

But UMW shareholders are promised a 20% to 30% discount to the stock’s theoretical ex-rights price based on its five-day volume-weighted average price preceding the cash call.

“That provides our shareholders with an opportunity to increase equity participation in the company at a good discount,” says Badrul.

From UMW’s perspective, he also feels the rights issue will improve its financial flexibility and strengthen its capital base. The cash call will keep its debt at a manageable level in respect of the proposed acquisitions as UMW keeps an eye on its gearing.

“These are productive assets, so if the concern is post-rights dilution, we are confident that it will be earnings accretive,” says Badrul. “There won’t be dilution post-rights (long term).”

Based on unaudited figures, as at Dec 31, 2017, UMW had RM3.96 billion in long-term and short-term borrowings against RM4.18 billion in total equity.

With RM1.16 billion cash, its net gearing is at 0.38 times but the group is looking at the gross gearing of 0.95 times as its reference point.

The long-term aim is to reduce that to 0.5 times, says Badrul, adding that UMW does not want to over-leverage. “There is no point in investing in a company by taking up a lot of debt. At the end of the day, you end up paying the banks. If anything goes wrong, then you are in trouble,” he tells The Edge.



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