Investors advised to buy into UMW as proposed rights issue
KUCHING: Analysts have viewed UMW Holdings Bhd’s ( UMW) proposed rights issue to finance the group’s MBM Resources Bhd’s (MBM) acquisition as a good deal.
As such, they suggest that investors should buy into the stock.
In a filing on Bursa Malaysia, UMW announced a proposed renounceable rights issue of new ordinary shares in the group to raise gross proceeds of up to RM1.1 billion.
UMW is proposing to undertake the proposed rights Issue to raise the necessary proceeds to primarily repay a bridging facility to be obtained by UMW to finance both the proposed acquisition of all the ordinary shares in MBM held by Med-Bumikar Mara Sdn Bhd (MedBumikar) and Central Shore Sdn Bhd, a wholly-owned subsidiary of Med-Bumikar.
This collectively represents 50.07 per cent equity interest in MBM and the resultant proposed mandatory take-over offer for all the remaining MBM shares not already owned by UMW and persons acting concert with it, if any, after the proposed MBM acquisition.
The research arm of MIDF Amanah Investment Bank Bhd’s (MIDF Research) opined, UMW has to resort to a rights issue as the majority of gross cash of RM1 billion at UMW group sits at 51 per cent-owned UMW Toyota.
“The extent of dilution will depend on the number of MBM minorities taking up the cash offer and the prevailing price of UMW preceding price fixing date,” it said.
According to MIDF Research, the exercise will be less dilutive to UMW if MBM’s minorities opt for the share swap option.
“This is because pricing of UMW shares in the share swap is fixed higher at RM6.09 per share, whereas a cash payment to MBM’s minority will be financed via cash call to existing UMW shareholders at 20
The extent of dilution will depend on the number of MBM minorities taking up the cash offer and the prevailing price of UMW preceding price fixing date. MIDF Research
per cent-30 per cent discount to Theoretical Ex-Rights Price (TERP) of UMW shares based on 5-day VWAP preceding a price fixing date to be determined in due course.
“To give an illustration, this would work out to around RM4.30 to RM4.40 per share.”
That said, MIDF Research pointed out that earning expansion from the acquisitions will more than offset any dilution from potential new share issuance to fund the acquisitions.
The research arm’s sensitivity analysis suggests in a worst case, full cash payment scenario, UMW still attains earnings accretion of four per cent for financial year 2019 forecast (FY19F), whereas in a best case, full shares scenario, net earnings accretion rises to six per cent for FY19F.
It noted that this situation is possible given the large deviation in valuation between UMW, with 14-fold FY19F price earnings (PE), versus the offer for MBM at just eight-fold FY19F PE.
“While we expect initial share price pressure given a potential cash call to fund the acquisitions, we suggest investors buy into UMW as this would be a good deal if it is successful, given UMW’s potentially cheap entry into MBM at just eightfold FY19F earnings and effective six per cent to seven per cent dividend yields attained from Perodua at the entry price,” it said.
Meanwhile, on a full- year contribution basis in FY19, the resear charm of Kenanga-Investment Bank Bhd (Kenanga Research) expected earnings per share (EPS) accretion of 11 per cent (full cash scenario) and 14 per cent (full share scenario), respectively, despite the rights issue for both scenarios.