Mainstream
UMW auto unit listing unlikely for now
Khairul Khalid 
UMW’s core business is its auto division which contributes 81% to group revenue
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With the industry abuzz over UMW Holdings Bhd’s proposals that would see it acquire a controlling stake in Perusahaan Otomobil Kedua Sdn Bhd (Perodua), the investing community’s attention is drawn to what might be in store for the national carmaker.

One scenario is a possible spin-off and listing of UMW’s auto division, which already has the popular Toyota brand under its portfolio in addition to its 38% stake in Perodua, which is set to increase to 70% if the deals go through.

However, an analyst says it is doubtful a spin-off of the group’s core businesses would materialise, at least for the time being, due to the overwhelming size of its auto segment.

 

Three core businesses

“I don’t see any spin-off for now. It won’t make much business sense from UMW’s perspective. A huge chunk of group revenue is from its auto business,” he says.

“If it spins off the auto segment, the other two will not have significant value as standalone businesses. UMW is synonymous with its auto business with Toyota, and the rest of its businesses are still quite minor.”

A UMW spokesperson tells FocusM it is “too preliminary” to assess a spin-off at this stage.

“In the near term, we are focusing our efforts on completing the transaction and integrating the businesses. Upon completion of the (Perodua) transactions, we will continuously evaluate strategic options that will put the company in a better position to grow its businesses and enhance shareholder value,” the spokesperson adds.

Currently, UMW’s three core business segments are motor vehicles, equipment, and manufacturing and engineering.

For its financial year ended Dec 31, 2017 (FY17), it posted a RM673.95 mil net loss on the back of RM11.04 bil revenue, and a whopping RM803.53 mil of losses were attributed to discontinued operations.

The auto division constituted 81% of total group revenue in FY17, followed by equipment (13%) and manufacturing and engineering (5.8%). The balance came from its oil and gas (O&G) segment which it began to exit last year.

In January last year, UMW decided to progressively exit its unlisted O&G business, following the spin-off of its former subsidiary UMW Oil & Gas Corp Bhd. It is in the process of divesting its remaining unlisted O&G assets.

 

Perodua a cash cow

The analyst says it is still too early to tell if there will be a change in direction for Perodua if the deals go through, but it would be logical to maintain continuity at the profitable carmaker.

“I think it would make sense to maintain the status quo. Perodua has a good reputation in the market, is well managed and profitable. Perodua will be a cash cow, and UMW will also gain from synergies in the auto parts business,” says the analyst.

Established in 1993, Perodua is a joint venture between Malaysian and Japanese partners. Its current shareholders are UMW Corp Sdn Bhd with 38% stake, MBM Resources Bhd (20%), Daihatsu Motor Co Ltd (20%), PNB Equity Resource Corp Sdn Bhd (10%), Daihatsu (Malaysia) Sdn Bhd (5%), Mitsui & Co Ltd (4.2%) and Mitsui & Co (Asia Pacific) Pte Ltd (2.8%).

Last year, it enjoyed a 35.5% market share of Malaysia’s passenger car segment with 204,887 units sold, followed by Honda (19%), Proton (12.3%) and Toyota (12.1%).

Its two main subsidiaries are Perodua Sales Sdn Bhd which is involved in the marketing and distribution of motor vehicles and spare parts, and Perodua Manufacturing Sdn Bhd which manufactures and assembles motor vehicles.

For FY16, Perodua Sales posted a profit after tax of RM218.28 mil on the back of RM9.04 bil revenue. During the same period, it had total assets of RM2.1 bil and total liabilities of RM816.93 mil.

For FY16, Perodua Manufacturing registered a profit after tax of RM170.1 mil on the back of RM3.66 bil revenue. It had total assets of RM2.81 bil and total liabilities of RM539 mil.

 

Focus on disposal of O&G assets

Another local auto analyst concurs a listing of UMW’s auto division is not on the cards anytime soon.

“UMW’s auto segment will be strengthened further if it is successful in taking control of Perodua, especially given the brand’s current position as a leading carmaker in the country,” he says.

“We think its auto division will not go for public listing in the near future, as currently the group is in the midst of negotiating the disposal of its unlisted oil and gas segments. It will be focusing on its high value-added manufacturing business, the aerospace segment, which is likely to break even in FY19.”

The analyst notes if the group plans to list its auto segment, the earliest is perhaps five years from now.

On March 9, UMW announced a plan to buy a 50.07% stake in MBM, through separate conditional offers to the latter’s majority shareholder Med-Bumikar Mara Sdn Bhd (49.5%) and Central Shore Sdn Bhd (0.57%) for a total consideration of RM501 mil. MBM currently holds a direct 20% stake in Perodua and 2.6% indirectly via Daihatsu Malaysia.

If that is successful, UMW will proceed with a mandatory takeover offer for the remaining shares in MBM and delist it.

An investment holding company, MBM’s business includes the distribution and dealership of international and local vehicle brands such as Perodua, Daihatsu, Hino, Mitsubishi, Volkswagen and Volvo. It also manufactures auto parts such as wheels, airbags, seat belts, steering wheels, and noise, vibration and harshness control products.

UMW also plans to purchase an additional 10% stake in Perodua from PNB Equity Resources Corp Sdn Bhd for RM417.5 mil, which will be settled via 49.2 million (4.2% of share capital) new UMW shares at an issue price of RM6.09 apiece and RM117.5 mil cash.

Collectively, UMW will gain an additional 32.6% stake in Perodua if the deal is approved, giving it a controlling 70.6% stake in the national carmaker. UMW has proposed to undertake a rights issue to raise the necessary funds to finance the deals.

Analysts are generally positive about the deal from UMW’s perspective because it will strengthen its auto business.

A report by Hong Leong Investment Bank is positive the deal will enhance UMW’s leading position in Malaysia’s auto market, in line with its restructuring exercises to focus on core businesses that include auto and manufacturing.

There are potential synergies from the consolidation of both UMW and MBM, it adds.

 

Not a done deal

However, UMW’s proposal is far from a done deal because valuation could be a sticky issue for the parties involved. At RM2.56 per share, the offer values MBM at RM1 bil (based on 100% equity value, representing a 16.4% premium over the last transacted price on March 9).

Another analyst says the offer is “quite low” and UMW could be forced to return with a better one. He suggests a price slightly above RM3 per share should be enough to seal the deal with MBM.

MIDF Research also considers UMW’s proposal as “less than attractive” as it is below its revised sum-of-parts (SOP) based valuation of RM3.10/share (which rolls over valuations to FY19F) and at a steep 30% discount to the company’s FY17 book value of RM3.68/share.

However, MIDF cites “qualitative” factors beyond mere valuations may drive Medbumikar’s board to accept the offer. The block of shares in Perodua can be considered a strategic national asset and only a restricted number of potential acquirers would qualify for such a deal. Medbumikar is 30% owned by Mara with the rest controlled by the founding family members.

“We think the deal is cheap for UMW to obtain a controlling stake in Perodua and is unlikely to appear enticing enough for MBM’s minorities to accept.

“On the flip side, existing investors in MBM could accept UMW’s offer and instead build up a larger position in UMW which clearly benefits if the deal goes through,” says MIDF.

However, the UMW spokesperson says the company is offering “a fair price”, with a premium of more than 13%.

“In addition, the minority shareholders of MBM will have the choice of a cash offer, or an equivalent share offer. Those who wish to remain invested in the auto sector will have the option to invest in UMW instead, and will benefit from the liquidity of our shares and potential growth of the UMW Group.”



This article first appeared in Focus Malaysia Issue 277.