Sime Darby Bhd’s takeover of UMW Holdings Bhd has expanded its presence in the local automotive market to the mid-market and affordable segments from its previous predominantly premium offerings, according to Kenanga Research.
“This puts it in a better position to navigate the impending fuel subsidy rationalisation,” it said in its Company Update today (Feb 9).
Kenanga Research raised its FY24 and FY25F net profit by 2% and 14% respectively, on earnings enhancement from UMW’s acquisition.
Correspondingly, it upgraded our Sum of Parts (SoP)-derived target price (TP) by 14% to RM2.80 from RM2.45 and maintained OUTPERFORM call.
“There is no adjustment to our TP based on environmental, social and governance (ESG) given a 3-star rating as appraised by us.”
The research house said upon the conclusion of UMW’s takeover in February 2024, Sime Darby will have a full spectrum of automotive offerings.
Post acquisition, it said that Sime’s market share in the local automotive total industry volume (TIV) will surge from 3% to more than 50%, with well-known marques such as Toyota and Perodua.
“UMW provides access to the massive Toyota ecosystem, a strong high-value supply chain and will enhance Sime Darby’s local market exposure.
“Geographically, the group will have equal exposure to Malaysia, China and Australia with remaining 10% in other markets compared to being predominantly in China previously..
“Moreover, Sime Darby will likely benefit from the anticipated new launches of Perodua D66B and Toyota Yaris Cross by April 2024,” it said.
The all-cash deal RM5.8 billion to acquire UMW is financed by Sukuk Murabahah (RM3 billion) and sales proceeds from the disposal of its healthcare business which was completed in December 2023 (RM2.8 billion).
UMW will be delisted in February 2024, with offer period ended on 31 January 2024, and UMW will be suspended from trading starting today, 9 February 2024.
Kenanga said post-business integration with UMW, Sime Darby’s net debt will increase from almost RM4 billion to RM5.9 billion while its net gearing will rise from 0.2x to 0.4x.
“This include UMW’s net cash position at RM1.1 billion. Subsequently, Sime Darby plans to pare down its debt through the disposal of Malaysia Vision Valley land in Labu, Negeri Sembilan (RM2.96 billion) and the disposal of Komatsu and UMW’s Serendah land.”
The research house like Sime Darby for its robust growth in its businesses post-pandemic, the strong brands under its stable such as BMW, Caterpillar, Toyota and Perodua, and its attractive dividend yield of more than 5%.
The risks to Kenanga’s call include governments cutting back on infrastructure spending on austerity drive, slowdown in the mining sector, hurting demand for heavy equipment, consumers cutting back on discretionary spending and persistent disruptions in the global automotive supply chain.
