UMW Holdings : UMW-Sime Darby Motor consolidation on the table? HOLD

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UMW Holdings : UMW-Sime Darby Motor consolidation on the table?    HOLD

The Edge Weekly reported that Permodalan Nasional Bhd (PNB) is looking at the possibility of merging UMW Holdings (UMW) and Sime Darby's (Sime) motor division. PNB is the biggest shareholder in UMW and Sime with a stake of 58.19% and 51.9% respectively. UMW makes and distributes Toyota cars with 51%-owned UMW Toyota Motor, which also distributes Lexus. It is also the largest shareholder in Perodua with a 38% stake. Toyota and Perodua together accounted for 46% of last year's TIV with 217K in total sales. Sime's motor division is a more diversified one and carries both mid-range (Hyundai and Ford) and luxury (BMW, Land Rover, Porsche, Jaguar) names. The two key segments are Assembly (certain models of BMW, Land Rover and Hyundai are built in 51%-owned Inokom) and Distribution (it imports and distributes brands including BMW, MINI, Rolls-Royce, Porsche and Mitsubishi for a number of Asia-Pacific markets). It sold a total of 83K units in its FYE June 2016.

Both UMW and Sime's auto businesses are currently profitable, although profitability and margins have taken a beating from the current downturn. UMW's auto segment made a revenue of RM8.5bil and net profit of RM301mil in FY16, while Sime's motor segment made a revenue of RM19.4bil and PBT of RM537mil in the same period. The main challenges for a merged entity would be to find cost and operational synergies, and avoid cannibalisation. The goal would be to maximise utilisation, save on development costs and use a single entity to cater to several distinctive market segments. We retain a HOLD call and SOP-based fair value of RM5.20 on UMW. It is in the process of dispensing its O&G businesses via the demerging of UMWOG (by end-2Q) and disposal of unlisted O&G assets by the end of this year.

Others :

UMW Oil & Gas Corporation : Negligible impact from short-term Vestigo charter                                               HOLD

Plantation Sector : Inventory down 5.3% MoM in Feb 2017                                                                                           NEUTRAL

Technology Sector : TFA ratification to boost global semiconductor sales                                                                OVERWEIGHT

QUICK TAKE

Plantation Sector : Newsflow for week 6 to 10 March      NEUTRAL

Sime Darby : PNB to merge motor unit with UMW?         HOLD

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