CIMB Research raises target price for UMW after demerger

KUALA LUMPUR: CIMB Equities Research has upgraded UMW Holdings Bhd from Reduce to Add with a higher target price after its proposed corporate exercise to exit the oil and gas business.

It said on Friday the higher target price of RM5.10 compared with RM4.30 was now based on 12 times CY18 price-to-earnings (P/E), similar to its 10-year historical mean of 12 times and 80 sen for dividend valuation on UMW Oil and Gas.

“We use P/E as it captures the stronger earnings recovery post de-merger. We see this exercise as a positive re-rating catalyst for the stock. Key downside risks are deteriorating TIV sales for Toyota and Perodua,” it said.

On Thursday, UMW Holdings management announced that it is exiting the oil and gas sector to refocus on its three core businesses – automotive, equipment and manufacturing and engineering. 

UMWH will propose a bonus issue of 1.2 billion redeemable preference shares (RPS) to UMWH shareholders on the basis of 1.03 RPS for one existing share in UMWH. 

Then it will propose a redemption of all RPS at a premium that will be satisfied in the form of UMW-OG shares. Effectively, it will cease to be a shareholder of UMW-OG.
The exercise will be followed by a progressive exit from non-listed oil and gas assets held by UMWH. However, management indicated that it expected to impair such investments in the upcoming results announcement in Feb 2017. 

“We are positively surprised by the proposed disposal as we think the exercise will remove the drag on UMWH’s earnings and better reflect growth prospects from the other core businesses,” it said.

CIMB Research said the deal is expected to be completed in 2Q17. Therefore, it has stripped out 50% contribution from UMW-OG in 2017 and 100% contribution from UMW-OG in FY18 to reflect the timing of the deal completion. 

“Hence, we project accelerating earnings recovery for UMWH starting in 2H17. The de-merger will also be positive for UMWH’s financial position as management projects to improve gearing ratio from 91% to 43%.

“We agree with management’s decision to refocus on its core businesses as we see attractive growth prospects across these divisions. For example, UMW Toyota is in the midst of expansion, investing RM2bil into building a new factory in Bukit Raja with an initial production capacity of 50,000 units/year. 

“UMW is also diversifying its exposure in the manufacturing division as it is projected to begin production of the Rolls-Royce engine fan cases in 4Q17 following the 25-year contract awarded in 2015,” said CIMB Research.