Wahid to unlock value in Sime Darby and UMW


  • Business
  • Saturday, 21 Jan 2017

Lower gearing: UMW Holdings’ headquarters in Shah Alam. The divestment of its stake in UMW Oil and Gas Corp Bhd is expected to more than halve UMW’s gearing while its total borrowings will be reduced by 67 from about RM8bil currently, said MIDF Research in a note.

Permodalan Nasional Bhd (PNB) will implement more major changes to its two top holdings – Sime Darby Bhd and UMW Holdings Bhd – as part of it long-term strategy to unlock value and monetise the assets of both conglomerates, sources tell StarBizWeek.

PNB chairman Tan Sri Abdul Wahid Omar looks intent on making his mark on the fund by utilising his skills as a master restructurer.

“While the idea of a demerger in both Sime in UMW is not new, Wahid has been the catalytic force to bring about major changes in the two groups. The two main priorities are to lighten their debt load and strengthen the individual business segments. The days of the mega conglomerates are over,” says an investment banker.

It is worth noting that Wahid was appointed at the helm of Malayan Banking Bhd (Maybank) in May 2008, several months after the RM60bil listing of Synergy Drive Bhd which was the result of a mega merger between Sime Darby Bhd, Kumpulan Guthrie Bhd and Golden Hope Plantations Bhd.

Maybank’s rival CIMB Group, led by Datuk Seri Nazir Razak, initiated the merger proposal which was the biggest in corporate Malaysia’s history at the time. Synergy Drive was later renamed as Sime Darby Bhd.

Since the listing, as it emerged that the merger did not bring about the expected appreciation in profits and Sime’s share price, Wahid and Maybank’s top bankers advocated a proposal to break up the conglomerate into seven entities, according to a source familiar with the project.

In fact, one of Wahid’s first acts as PNB chairman was to ask his team to revisit the demerger idea which had originally been presented to Sime’s board of directors several years ago, he added.

With recent developments all but indicating that such a breakup plan is already in motion, he may yet achieve this vision by improving the financials of both Sime and UMW.

If he succeeds with wholesale changes, the benefits for both UMW and Sime’s investors will be two-fold.

First, the prospect of capital appreciation in both their share prices are considerable given that Sime’s stock price has stagnated over the past three years while UMW’s stock price has lost two thirds of its value over the same period.

Secondly, and more importantly for institutional holders such as PNB, shedding off unprofitable businesses and raising funds from spinoffs will improve the groups’ dividend payout capabilities. Based on present prices, UMW and Sime currently yields around 2% and 3% respectively, according to Bloomberg data.

In addition, the newly spun off or consolidated businesses would emerge as leaner entities with strong cash flow generation, which could see higher cumulative dividends from the segments.

In terms of scale, Sime’s plantation business and UMW’s automotive business are among market leaders in their respective segments and have consistently maintained their profitability despite being dragged down by the underperformance of their sister companies.

Sime’s low hanging (palm) fruit

The recent strong recovery in crude palm oil (CPO) prices presents a window of opportunity for a major corporate exercise involving Sime Darby Plantations (SDP), which contributes about a third of Sime’s total revenue and net profit during its 2016 financial year.

A recent report by UOBKayHian Research estimates the segment alone is worth up to RM60bil, which compares favourably to Sime’s current market capitalisation of RM58bil.

With the prospect of stabilising CPO prices and a significant uptick in production, the benefits of listing SDP as a standalone entity is immediately apparent. Through a partial sale of new shares, the company can raise funds to pay off a significant chunk of its debt which mainly arose from the RM6bil acquisition New Britain Palm Oil Ltd (NBPOL) in 2015.

“If Sime opts for this route, the concern now is on the residual debt left behind which will be serviced by the automotive and industrial businesses, among others.

This is because separating SDP takes out a large chunk of the cash flow out of the holding company.

But the move is necessary to maximise value for Sime,” said an analyst.

One way to cut down the debt further is to move out Sime’s property division and merge it into PNB’s stable of property holdings. According to UOBKayHian, the property division is worth RM11.6bil based on a 40% discount to its realisable net asset value (RNAV).

This means that what is left of Sime will comprise mainly of its automotive and industrial divisions.

Sime Darby Motors (SDM), which is primarily in the distribution business for top brands such as BMW and Ford, operates in 10 countries in South-East Asia and sold 83,060 vehicles last year.

SDM reported a RM502.5mil pre-tax profit on the back of RM18.92bil in revenue in FY16.

Despite lower demand for cars and unfavourable exchange rates affecting its business, the company has actually demonstrated consistent revenue growth in each of the past five financial years, underscoring its ability to endure a challenging market environment.

As for its industrial division, Sime has already secured a new income source last year via the reverse takeover of Singapore-listed Saizen REIT which involves the injection of Sime’s RM1.1bil worth of industrial properties in Australia.

The recurring income will help offset Sime Darby Industrials’ weaker operating profits due to lower demand for heavy equipment which fluctuate in tandem with economic growth. The segment reported its lowest pretax profit in five years at RM326.3mil for FY16 from revenue of RM9.62bil.

With the announcement of its exit from the oil and gas business this week, UMW is following the footsteps of Sime which divested its own oil and gas division for RM695mil back in 2011.

However, the company, which is similarly involved in the automotive and industrials business, is venturing into a new business to achieve growth in the coming years.

This is made easier by a considerably lighter balance sheet.

The divestment of its stake in UMW Oil And Gas Corp Bhd is expected to more than halve UMW’s gearing while its total borrowings will be reduced by 67% from about RM8bil currently, said MIDF Research in a note.

UMW is investing RM750mil into its new aviation venture with Rolls-Royce Plc to manufacture and assemble fan cases for Rolls-Royce’s aero engines.

With the first orders expected to come in later this year, the group has previously said that it expects the 25-year contract to become profitable within two or three years as production ramps up.

The high-margin business is expected to become a major driver for UMW’s future earnings outlook.

In the meantime, UMW is mainly reliant on its automotive business and the strength of the Toyota brand for its earnings.

That said, the segment is on track to achieve a lower revenue for FY16 compared with the year before due to lower local demand for vehicles.

Nevertheless, its cumulative results for the nine-month period ended Sept 30, 2016 (9MFY16) show that its pre-tax margins remain among the highest in the automotive industry.

It reported a pre-tax profit of RM349.5mil from RM5.99bil in revenue, translating to a pretax margin of 5.8%.

Through its automotive unit UMW Toyota Motors Sdn Bhd, the group is set to increase its production capacity by 70% with the construction of its second production plant by 2018.

The new plant is said to be focused on the production of small vehicles with a capacity of 50,000 units per year, adding to UMW’s current plant which has a capacity of 75,700 units.

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