UMW Holdings (UMWH MK; BUY; TP: MYR12.44): Rationalizing non-core M&E assets

UMW Holdings (UMWH MK; BUY; TP: MYR12.44): Rationalising non-core M&E assets

• What's New? UMW Corporation (UMWC), a 100%-subsidiary of UMWH, has inked a Sale and Purchase Agreement with Dato’ Muthukumar a/l Ayarpadde (founder of privately owned MK Group of companies) to sell UMWC’s non-core manufacturing and engineering (M&E) assets for a total MYR73m cash, comprising: (i) a 61.08% stake in MK Autocomponents Ltd (MKAL) for MYR21m, (ii) a 55% stake in MK Automotive Industries Ltd (MKAIL) for MYR16m, and (iii) 106m compulsory convertible debentures (CCD) issued by UMW Dongshin Motech for MYR36m.

UMWH expects the proposed disposals to result in an impairment loss of approximately MYR93m or 8sen/UMWH share. Upon sale completion by end-2014, MKAL and MKAIL will cease to be subsidiaries of UMWH.

• What’s Our View? Our forecasts are unchanged as the disposal is not expected to have any material impact on earnings. We are positive on this disposal as it is in line with UMWH’s longer-term strategy to rationalise its non-core operations and relocate its resources to its core operations, where UMWH has better expertise. We understand from the management that these companies were loss-making at ~MYR40m in total, in FY13.

We note that there may be margin erosion from higher advertising and promotion (A&P) expenses in 2Q14 as UMWH competes for market share in the pre-Hari Raya sales campaign. There is upside to our forecast for UMWH’s auto earnings as 1H14 Toyota vehicles sales beat our expectations at 55% of our FY14 forecast. Pending further clarity on auto margin in the 2Q14 results announcement, we keep our earnings forecasts unchanged.

UMWH share price have moved by 10% since our upgrade in Apr (Attached is our upgrade note on UMWH and MBM on 21 Apr 2014). With potential upside to our earnings forecasts, valuation remains compelling at just 12.8x FY15 earnings, supported by 3+% yield (based on 50% DPR).

• Foreign shareholding rebounded from a 2-year low. As at end-Jun 2014, UMWH’s foreign shareholding jumped to 17.7% from a two-year low of 16.0% at end-Mar 2014. Given limited downside and better outlook, we do not rule out further accumulation, with UMWH being viewed as a cheaper exposure to 55.2%-subsidiary UMW Oil & Gas (UMWOG MK; BUY; TP MYR5.15). UMWH’s foreign shareholding reached its highest point of 25.9% at end-Mar 2013.