The biggest automotive news to hit Malaysia is probably for the proposed acquisition of UMW Holdings the distributor and assembler of Toyota and Perdoua cars by Sime Darby for an estimated RM3.57 billion. Research house RHB has rerated the Sime Darby share price from RM2.15 to RM2.50.
RHB said even though earnings are accretive neutral on the proposed transaction, the house thinks it lacks synergies, lowers dividend payouts, and adds non-core assets to SIME.
Here’s the gist, Sime is proposing to buy Permodalan Nasional’s 61.18% UMW stake for RM3.57bn, which will trigger a mandatory general offer. As recommended UMW’s minority shareholders accept the MGO in this eventuality, RHB assumes SIME will acquire 100% of UMW. Its offer price of MYR5/share implies a premium to UMW’s 5-year historical mean of 13x and our ascribed 11x. We are not in favour of the valuation premium, given the lack of synergies.
The house thinks the acquisition is largely orchestrated by PNB, which is a 50.3% shareholder of SIME and holds a 61.18% stake in UMW. RHB believes SIME’s acquisition of UMW will allow it to diversify into the automotive mass market, and have a more balanced revenue exposure between Malaysia, China and, Australasia while expanding local market share. In 7M23, SIME and UMW held a 57% market share.
In an all-cash deal, SIME will fund the acquisition with 85% debt and 15% internally generated cash. Accounting for the 50% debt-funded acquisition of Cavpower, SIME’s gearing ratio could reach 0.84x, above its desirable 0.6x limit. Consequently, it would use proceeds from its future healthcare unit and Malaysia Vision Valley land sales to pare down the debt. This significantly reduces the odds of special dividends. SIME will also have a lower dividend payout ratio (DPR) (FY21-23: c.66%) in the coming years but will maintain it above its 50% DPR policy.
Neither SIME nor UMW have engaged their principals on the potential transaction. Aside from shareholders, the principals’ views on the transaction could make or break the deal, as the deal involves competing brands, eg Caterpillar and Komatsu.
Post proposal, the house maintains its earnings estimates but lower FY24F-25F DPS on lower DPR. Upgrade to BUY with higher MYR2.50 TP (SOP). As currently have yet to bake in UMW contributions to SIME’s estimates, RHB tactically raises its SOP components’ valuations to reflect the anticipated earnings accretion to SIME post-acquisition.
