PARENT company Permodalan Nasional Bhd (PNB) is looking to merge Sime Darby Bhd’s motor division with UMW Holdings Bhd, sources say. PNB is the major shareholder in both companies, holding 51.9% and 58.19% respectively.

“Instead of listing Sime Darby Motors as a separate company, PNB has plans to merge the motor division with UMW Holdings. This will create a massive motor company under PNB’s roof,” says a source.

UMW Holdings assembles, markets and distributes Toyota vehicles as well as markets and distributes Lexus vehicles in Malaysia. It is also the single largest shareholder of Perusahaan Otomobil Kedua Sdn Bhd (Perodua). Its automotive division is said to be the industry leader, commanding a 46% share of the market last year.

Meanwhile, Sime Darby Motors assembles, imports, distributes and sells luxury automotive brands such as BMW, Jaguar, Land Rover and Porsche. It also distributes and sells mass market brands such as Ford and Hyundai in the Asia-Pacific.

At the time of writing, PNB had yet to respond to queries from The Edge.

“A merger would make sense as UMW Holdings is short on cash while Sime Darby Motors holds the distributorship of BMW in the Asia-Pacific, and BMW sells,” says another source.

As at Dec 31, 2016, UMW Holdings’ net gearing stood at 0.89 times with total borrowings at RM6.4 billion and cash at RM2.18 billion.

A merger between the two PNB subsidiaries should not come as a surprise given that PNB had indicated in a press conference late last year that it was considering spin-offs and demergers to create value in companies in which it held majority stakes. The fund manager said that it was part of its five-year strategic plan to boost the overall performance of its investment holdings.

Sime Darby started the ball rolling when it announced plans to spin off its plantation and property arm in 2018 to unlock value in its assets. This would leave the conglomerate with the motor, industrial and logistics businesses, with the motor arm as the largest revenue and profit contributor to the group.

Shortly after that, UWM Holdings made the news, announcing that UMW Oil & Gas Bhd (UMWOG) would be carved out of UMW Holdings and consolidated with Ekuiti Nasional Bhd entities. If all goes well, UMWOG will be demerged by 2QFY2017.

UMW Holdings CEO Badrul Feisal Abdul Rahim had clarified in a previous interview with The Edge that the demerger was not driven by PNB.

It is worth noting that UMW Holdings’ automotive division contributes the most to its revenue and profits. In the financial year ended Dec 31, 2016 (FY2016), 77% of revenue and 74% of profit before tax were derived from the division.

But the group still fell into the red in FY2016 with net losses of RM1.73 billion, thanks to impairments and provisions for the oil and gas division.

Some weakness was also seen in the automotive segment, which saw a 21.1% decline in revenue to RM8.46 billion while profit before tax slipped 42.7% to RM493.1 million.

The group says the poorer performance of its automotive segment is in line with the drop in total industry volume (TIV) to 580,124 units in 2016 from 666,677 units a year earlier.

“This was aggravated by the continued stiff competition and stringent approval requirements on hire-purchase loans imposed by the banks. The continued weakening of the ringgit resulted in shrinking business margins, hence adversely impacting the profitability of the segment,” it said in its 4Q2016 results announcement.

Over at Sime Darby, Sime Darby Motors contributed 43% to group revenue and 16% to group profits in the financial year ended June 30, 2016. The motor division sold 83,060 units during the financial year.

The group’s results announcement for 2QFY2017 also saw Sime Darby Motors’ earnings slip 7% from a year earlier due to a gain on disposal of property recorded in the previous year. Excluding the gain, the motor division’s earnings increased 36%, attributable to higher contributions from Malaysia, China and New Zealand.

Over the past one year, UMW Holding’s share price shed 19.2%, closing at RM5.76 last Friday. In contrast, Sime Darby’s rose 14.5% to close at RM8.99 last Friday.

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