This article first appeared in The Edge Malaysia Weekly on June 5, 2023 - June 11, 2023

PERMODALAN Nasional Bhd (PNB) is believed to be looking at selling its entire stake, and those held under its funds, in UMW Holdings Bhd, according to two sources privy to the matter.

One of the sources says that at least five bidders have thrown their hats into the ring. It is learnt that Sime Darby Bhd, Bermaz Auto Bhd and Mitsui & Co Ltd of Japan, are among the bidders who have indicated their interest in taking over the stakes.

PNB and its funds collectively held 60.56% of the shares in UMW, as at March 15, 2023, according to UMW’s 2022 annual report.

According to the annual report, PNB fund, Amanah Saham Bumiputera (ASB), is the largest shareholder of the group, with 44.96% equity interest, while PNB itself owned a 4.08% stake in the conglomerate as at March 15, 2023. Other smaller PNB-managed funds own a collective 11.52% of the total UMW share base.

PNB declined to comment on the possibility of a corporate exercise involving its stake in UMW.

UMW is one of PNB’s strategic companies, alongside Sime Darby, Sime Darby Property Bhd, Sime Darby Plantation Bhd and Malayan Banking Bhd.

A strategic investment is where PNB owns the majority of the shares or is the single largest shareholder of the company.

Disposing of the stakes in UMW would not be easy for PNB, say observers. UMW is one of the biggest automotive and industrial groups in the country, with strategic partnerships with global companies such as Toyota Motor Corp and Komatsu Ltd.

“PNB will have to make sure that whoever buys the shares will be accepted by the strategic partners. Toyota might not want a shareholder who also owns businesses that are in competition with its presence in Malaysia,” says an automotive industry player.

Toyota has been a partner of UMW since the formation of Sejati Motor Sdn Bhd in 1982 in a 51:49 joint venture. In 1987, Sejati Motor was renamed UMW Toyota Motor Sdn Bhd. The company assembles, markets and distributes Toyota vehicles in Malaysia.

UMW and Toyota’s subsidiary Daihatsu Motor Co Ltd are also partners in Perusahaan Otomobil Kedua Sdn Bhd (Perodua), the largest car maker in the country.

UMW owns 38% of Perodua, while Daihatsu and its Malaysian subsidiary Daihatsu (Malaysia) Sdn Bhd own 25%. The rest of the shares are held by MBM Resources Bhd with a 20% stake, PNB Equity Resource Corp Sdn Bhd with 10% and Mitsui with 7%.

This makes Perodua a 68:32 joint venture between Malaysian and Japanese entities.

“Among the known bidders, Mitsui might be the one that Toyota might have the least opposition to. After all, it is a trading house rather than an automotive group that might want to grow a specific brand. And it is also a shareholder of Perodua,” says the automotive player.

“However, it would still be tricky for PNB to sell its entire stake in UMW to a Japanese party as that would raise concerns about bumiputera equity holding in a major corporation.”

Another market observer points out that PNB might not just take offer prices as a consideration if it decides to sell its stake in UMW. Finding a partner that can grow UMW’s automotive business to a higher level could be a major consideration that PNB will be looking at as well, the observer says.

In this case, PNB might not be selling the entire stake in UMW, but a substantial stake that could bring in a strategic partner at the holding company level. A placement of a 25% stake would still leave PNB as the largest shareholder of UMW.

With the share price at RM3.79 apiece on Friday, PNB’s 60.56% stake is valued at RM2.68 billion. The counter has risen 14.16% over the last year but is still 41.42% lower than where it was five years ago, when the shares were trading at RM6.47 each.

It is worth noting that another potential growth engine is UMW’s aerospace division, which manufactures fan cases for Roll-Royce Holdings plc.  Aerospace is part of the group’s manufacturing and engineering segment. 

Last month, its unit UMW Aerospace Sdn Bhd secured a second contract worth RM1 billion from Rolls-Royce to manufacture rear cases for the latter’s Trent 1000 and Trent 7000 aircraft engines.

Rolls-Royce’s Trent 1000 and Trent 7000 engines are used by Boeing 787 and Airbus A330 neo wide-body aircraft for long-­distance fights.

UMW and Sime Darby operate in similar businesses of automotive and heavy industrial machinery. While UMW has a larger presence in the domestic automotive market than Sime Darby, the latter has a huge presence in Asia-Pacific and China through its luxury marque franchises.

Sime Darby distributes BMW and MINI in China, Hong Kong, Macau, Malaysia, Singapore, Thailand, Indonesia, Australia and New Zealand. Through Inokom Corp Sdn Bhd, the group assembles certain models from Hyundai, BMW, Mazda, Ford and Porsche in Kulim, Kedah.

PNB and its funds own slightly more than 50% of the shares in Sime Darby, according to the group’s 2022 annual report.

Selling the UMW stake to Sime Darby will mean PNB not having to lose its control of the auto-to-aerospace conglomerate. It would also create a giant group that will have a huge presence both in Malaysia and Asia-Pacific.

However, doing so will relegate Toyota (and its subsidiary Daihatsu) to just one of the brands and partners of the automotive business of the merged group. The same goes for Caterpillar Inc and Komatsu Ltd, which are competitors in the heavy industrial machinery segment.

Sime Darby is one of the largest dealers in Caterpillar machinery in the world, while UMW is a distributor of Komatsu machinery in Malaysia, Singapore, Papua New Guinea and Myanmar.

“It is not an easy endeavour for PNB to sell its stake in UMW. The political considerations, both domestically and with the strategic foreign partners, make it very difficult for it to sell the shares,” says the automotive player. 

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