This article first appeared in The Edge Malaysia Weekly on March 19, 2018 - March 25, 2018

FOR parent Permodalan Nasional Bhd (PNB), the performance of UMW Holdings Bhd in terms of total returns over the past 10 years can be summed up in one word — decent.

With a total return to shareholders — encompassing share price gains and dividends reinvested — of 38.55% over the past 10 years, UMW’s performance was not great compared with other PNB counters, but it was not too shabby either.

Of course, it is nowhere near CCM Duopharma Biotech Bhd, one of the country’s leading pharmaceuticals manufacturers, or PNB’s crown jewel Malayan Banking Bhd, the country’s largest lender by assets. Both investments have proven lucrative — giving the fund returns of more than 100% over the past 10 years.

However, UMW’s performance in terms of total returns at least has fared better than other PNB investee companies such as Sime Darby Bhd and MNRB Holdings Bhd. Bloomberg data shows that before its demerger exercise at the end of last year, Sime Darby had delivered returns of 14.36% to its shareholders over the previous 10 years while reinsurer MNRB Holdings had chalked up returns of 5.24%.

Recall that UMW had a great financial year 2012 ended Dec 31, attaining RM2 billion in profit before tax mainly owing to record sales in its automotive division. But the slump in crude oil prices that started in mid-2014 coupled with the depreciation of the ringgit against the US dollar that affected its automotive sector resulted in the group slipping into the red in 2015 with a net loss of RM37.2 million.

Though in a loss-making position in 2015, UMW paid out dividends albeit at a lower rate compared to prior years. The total dividend per share declared was 20 sen, a drastic fall from the 50 sen given out in 2012. The dividend was also lower than Sime Darby’s 25 sen in the same year.

UMW’s dividend yield fell from 5.79% in 2012 to 2.07% in 2015. Prior to slipping into the red, UMW had kept its dividend payout ratio at between 57.7% and 76.1% from 2008 to 2014.

The group has not declared dividends for the past two financial years, which did not sit well with shareholders chasing dividend gains.

UMW’s returns are lower than that of other automotive players such as DRB-Hicom Bhd, which owns a 50.1% stake in national carmaker Proton, and the country’s largest Mercedes-Benz dealer Cycle & Carriage Bintang Bhd. Over the past 10 years, DRB delivered returns of 156.51% while Cycle & Carriage made 116.57%.

Note, however, that it might not be fair to compare UMW with DRB-Hicom as the latter is a more diversified group with interests in logistics, property, financial services and construction.

UMW’s returns are also lower than that of its target acquiree MBM Resources Bhd, which delivered total returns of 58.49% to its shareholders over the past 10 years.

Nevertheless, the announcement of the proposed takeover seems to have got the market excited over UMW’s prospects. RHB Research in a March 12 note upgraded the stock to a “buy” from a “sell”, with a target price of RM6.91.

“[MBM’s] 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 would 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,” RHB Research says.

MIDF Research in a March 14 note was equally positive about the deal. “While we expect an initial share price pressure given the potential cash call to fund the acquisitions, we suggest investors buy into UMW as it would be a good deal if it is successful, given UMW’s potentially cheap entry into MBM at just eight times FY19F earnings and effective 6% to 7% dividend yield attained from Perodua at the entry price,” the firm says.

MIDF maintained its “buy” call on UMW but revised its target price to RM7.11 from RM6.70 previously.

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