UMW rights issue is earnings accretive, says MIDF Research

PETALING JAYA: UMW Holdings Bhd’s proposed right issue to raise up to RM1.1 billion to fund the acquisition of MBM Resources Bhd is earnings accretive despite being a fully new share-funded acquisition, said MIDF Research.
“Earning expansion from the acquisitions will more than offset any dilution from potential new share issuance to fund the acquisitions. Our sensitivity analysis suggests in a worst case, full cash payment scenario, UMW still attains earnings accretion of 4% (FY19 forecast), whereas in a best case, full shares scenario, net earnings accretion rises to 6% (FY19F),” the research house said in a report today.
It added that this situation is possible given the large deviation in valuation between UMW (14 times FY19F price-to-earnings ratio) versus the offer for MBM at just eight times FY19 PE.
“While we expect initial share price pressure, given a potential cash call to fund the acquisitions, we suggest investors buy into UMW as this would be a good deal if it is successful, given UMW’s potentially cheap entry into MBM at just eight times FY19 forecast earnings, and effective 6%-7% dividend yields from Perodua at the entry price,” said MIDF.
It reaffirmed its buy call on UMW at higher target price of RM7.11 (from RM6.70) strictly on the 10% Perodua stake acquisition from PNB Equity Resource, as this is the only firm deal at this point.
“We also now breakdown valuations between UMW Toyota and Perodua in our new SOP (sum-of-parts)valuation. There is further significant upside if Medbumikar accepts the offer and UMW proceeds with its takeover of MBM.”
Meanwhile, Kenanga Research said on a full year contribution basis in FY19, it expects earnings per share (EPS) accretion of 11% (full cash scenario) and 14% (full share scenario), respectively, despite the rights issue for both scenarios.
“However, due to six-months contribution in FY18 from MBM and 10% Perodua, we will see EPS dilution of -5% (full cash scenario) and -3% (full share scenario) for both scenarios.”
Kenanga is keeping its FY18/FY19 earnings unchanged until the completion of the proposed acquisitions, and pending further announcements. It maintained its market perform call on UMW with an unchanged target price of RM6.25.