Cash call likely for UMW

It may sell new shares to raise funds for takeover of MBM

PETALING JAYA: UMW Holdings Bhd is likely to make a cash call by selling new shares to raise funds for the takeover of MBM Resources Bhd and an additional stake in Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

The acquisition plans, which will raise UMW’s equity interest in Perodua to 70.6% from the current 38%, have been received positively by analysts across the board.

Shares in UMW climbed 40 sen yesterday to close at RM6.35 in active trade, while MBM Resources jumped 24.5 sen to RM2.43.

In its published note, CIMB Research said that UMW could be forking out about RM1.12bil in cash and issue 49.3 million new shares to finance the purchase.

The research house pointed out that while UMW’s earnings per share could increase by 16%-20% if the group decides to raise the RM1.12bil cash through bank borrowings, its net gearing will also increase from 37% to 62%.

“Nevertheless, we believe the group could explore a cash call to finance the deal in order to mitigate the impact from higher finance

costs. Based on our estimates, UMW’s financial year 2018 (FY18)-FY20 net profit will increase by 23%-28% if the group decides the raise the cash entirely through a rights issue.

“We are positive on the proposed acquisition, as this will allow UMW to solidify its position as the leading automotive manufacturer in Malaysia and see immediate earnings contribution from Perodua. In addition, the acquisition will allow UMW to expand into the auto parts manufacturing business, namely, wheels, safety products and noise, vibration and harshness products.

“Overall, we expect pre-tax profit contribution from the auto division to rise from 76% in FY17 to over 80% in FY18,” said the research house.

Meanwhile, UOBKayHian Malaysia Research deemed the acquisitions’ valuations “attractive”.

“The acquisition of Perodua’s stake via the acquisition of MBM Resources represents a price-to-earnings (PE) ratio of 10.6 times respectively, and on a price-to-book basis, at 0.7 times for MBM Resources.

“Meanwhile, the acquisition of a 10% stake in Perodua from Permodalan Nasional Bhd (PNB) represents a PE of 9.2 times,” it said.

On March 9, UMW offered to buy all the ordinary shares in MBM Resources held by Med-Bumikar Mara Sdn Bhd and Central Shore Sdn Bhd (CSSB), a wholly owned subsidiary of Med-Bumikar, collectively representing a 50.07% interest in MBM Resources for RM501mil, or RM2.56 apiece.

Currently, MBM Resources holds a 22.58% effective equity interest in Perodua.

If UMW’s proposal is accepted, then its shareholding will rise from nil to 50.07% in MBM Resources, and UMW will be obliged to extend a mandatory general offer for the rest of MBM Resources’ minority shareholders.

Separately, UMW has also proposed to additionally acquire 14 million ordinary shares, or 10%, in Perodua held by PNB Equity Resource Corp Sdn Bhd (PERC), at a price of RM417.5mil, or RM29.80 apiece. PERC is the private equity investment arm of PNB.

The offer will be satisfied via the issuance of 49.26 million new UMW shares at an issue price of RM6.09 and RM117.5mil cash. Cumulatively, as a result of both the acquisition proposals, UMW’s interest will further increase to 70.6%.

Both acquisitions are not conditional upon each other and the offer period remains open until March 28.

Over the years, apart from its shareholding in Perodua, UMW has also been involved in the assembly and distribution of other marques of passenger cars and commercial vehicles in Malaysia.

Notably, the conglomerate is the exclusive distributor of Toyota and Lexus models domestically.

Following the acquisition of MBM Resources, UMW will also gain access to the Daihatsu and Hino distribution franchises.

RHB Research Institute, which is optimistic on the proposed move, described UMW and MBM Resources as a “good fit”.

“The Daihatsu and Hino distribution franchises would broaden UMW’s commercial vehicle offerings, given their focus on small and mid-sized trucks. We do not expect any objections from UMW’s key principal, Toyota, given that Daihatsu and Hino are already key companies within the Toyota Motor Group.

“MBM Resources’ autoparts business will also fit in seamlessly with UMW’s manufacturing and engineering division. The new ownership structure could also offer more supply contract opportunities for MBM Resources’ troubled alloy wheel-manufacturing business,” it said.

The research house has upgraded its recommendation on UMW to a “buy” and has also raised the target price to RM6.91 from RM5.40 previously.