KUALA LUMPUR (Aug 25): Research firms generally regard Sime Darby Bhd's acquisition of Permodalan Nasional Bhd’s 61.2% stake in UMW Holdings Bhd for RM3.57 billion as a premium deal, but highlighted complexities that must be addressed, specifically possible lower dividend payouts and competition among the brands owned by the two companies.
TA Securities in a note on Friday (Aug 25) said the acquisition may face some hurdles, given the complexity of the automotive ecosystem, particularly brand cannibalisation.
“[This is] especially [so] in the industrial division, where Sime Darby has the exclusive Caterpillar dealership in some regions, while UMW has a strategic partnership via a joint venture with Komatsu.
“On top of it, as there are too many principals and partners from both parties, the acquisition may face some hurdles from multiple third-party advisers, and create disruptions for both Sime Darby and UMW,” TA Securities said.
It added that the offer price of RM5 per share implies an acquisition price-earnings ratio (PER) of 14.1 times, based on UMW’s earnings for the financial year ended Dec 31, 2022 (FY2022).
“Based on our FY2023 earnings forecast of RM378.9 million, the PER would work out to 15.4 times. This is on the high side of the comparable peers’ PERs, and also higher than UMW's target price (TP)-implied PER of 13.7 times. In terms of P/B (price-to-book), the offer price implies a P/B of 1.3 times,” the research outfit said.
TA Securities maintained its "buy" call on Sime Darby, with a TP of RM2.50.
Meanwhile, RHB Research in a note recommended UMW’s minority shareholders to accept the mandatory general offer, as its offer price of RM5 per share implies 14.4 times FY2024 P/E, at a premium to UMW’s five-year historical mean of 13 times and RHB Research’s ascribed 11 times.
“We are not in favour of the valuation premium, given the lack of synergies. We assume Sime Darby will acquire 100% of UMW,” RHB Research said.
If it acquires 100% of UMW, RHB Research expects Sime Darby's earnings to rise 15% for the financial year ending June 30, 2024 (FY2024).
“The deal still requires shareholders and principals' approvals. Though earnings are accretive, we are neutral on the proposed transaction, as we think it lacks synergies, lowers dividend payouts, and adds non-core assets to Sime Darby,” said the research outfit.
RHB Research further stated that since it is an all-cash deal, Sime Darby will fund the acquisition with 90% debt and 10% internally generated cash.
“Accounting for the 50% debt-funded acquisition of Cavpower (Australia), Sime Darby's gearing ratio could reach 0.84 times, above its desirable 0.6 times limit. Consequently, it would use proceeds from its future healthcare unit and Malaysia Vision Valley land sales to pare down the debt,” RHB Research said.
Subsequently, this significantly reduces the odds of special dividends, where Sime Darby will also have a lower dividend payout ratio (DPR) in the coming years, compared to the 66% level from FY2021 to FY2023, but will maintain it above its 50% DPR policy.
RHB Research upgraded Sime Darby to a "buy", with a higher TP of RM2.50.
Kenanga Research in a note stated that it is positive on the acquisition, as it will strengthen Sime Darby’s presence in the local automotive market.
“Post acquisition, by virtue of having well known marques, namely Toyota and Perodua under UMW, Sime Darby’s market share in the local automotive total industry volume (TIV) will be boosted from 3% to over 50%,” Kenanga said.
The research firm added that UMW provides access to the massive Toyota ecosystem, a strong high-value supply chain, and will enhance Sime Darby’s local market exposure, which is in line with Malaysia's New Industrial Master Plan 2030.
Kenanga maintained its "outperform" call on Sime Darby, with a TP of RM2.50.