KUALA LUMPUR (March 14): The earnings expansion from UMW Holdings Bhd’s acquisition of MBM Resources Bhd is expected to offset any dilution impact from potential new share issuance to fund the acquisition, according to both MIDF Amanah Investment Bank Bhd Research and Hong Leong Investment Bank Bhd Research.

MIDF Research said in its report today that in a worst case situation under a full cash payment scenario, UMW Holdings still attains earnings accretion of 4% for its financial year ending Dec 31, 2019 (FY19).

It could see earnings accretion rise to 6% for FY19 in a best case, full shares scenario, the report added. The large deviation in valuation between UMW at about 14 times its FY19 expected price-earnings ratio (PE), against MBM Resources 8 times FY19 PE.

HLIB research’s analyst Daniel Wong also pointed out in his report that the acquisition will translate UMW Holdings’ 2018-19 PE of 9 times to 11 times and price-to-book ratio of 0.7 times to 1.0 times, as compared to UMW’s own valuation of 2018 PE of 23.1 times, 2019 PE of 16.5 times and price-to-book of 2.5 times.

“Based on worst case scenario (full cash), UMW shall raise RM1.1 billion, which shall be funded through rights issue of UMW’s 243.5 million shares (based on RM4.40 per share and 1 for every 5 UMW’s shares). UMW’s book per share will raise from RM2.64 per share (based on Dec 2017) to RM3.30 per share and net gearing shall improve from 51.6% to 33.6%”, Wong said.

Following the announcement of its proposed acquisition of MBM Resources, the group has proposed to raise the necessary proceeds to finance the proposed acquisition of 50.07% stake in MBM Resources from major shareholder Med-Bumikar Mara Sdn Bhd, for cash consideration of RM501 million (RM2.56 per share), 10% stake in Perodua from Permodalan Nasional Bhd (PNB) for RM417.5 million, which will be satisfied with cash RM117.5 million and issuance of 49.3 million new UMW Holdings’ shares at issue price of RM6.09 per share. 

If it proceeds with the mandatory general offer (MGO) for MBM Resources’ minorities, the latter will be offered two options, with cash at RM2.56 per share, similar to the offer for Med-Bumikar Mara Sdn Bhd’s buyout or through a share swap for UMW Holdings fixed at RM6.09 per share.

The rights issue is intended to raise up to RM1.1 billion, depending on the success of the expected MGO exercise. The amount is about 15% of the group’s current market capitalisation of about RM7.6 billion.

MIDF Research views the development as positive and an opportunity for investors to buy into UMW Holdings, as the deal is a potentially cheap entry into MBM Resources at just 8 times of its FY19 PE and effective 6% to 7% dividend yields attained from Perodua at the entry price.

The research house affirmed a Buy call at a higher sum-of-parts derived target price of RM7.11 from UMW Holdings.

While HLIB research is positive of the deal for UMW Holdings, the research house has maintained its Hold recommendation with an unchanged target price of RM6.10, based on sum-of-parts (assuming only Med-Bumikar Mara and PNB accept the offer, but not minority shareholders of MBM Resources). 

At 11.35am today, UMW fell 7.86% or 51 sen to RM5.98, with 2.50 million shares traded.