Key hurdles in UMW and Sime Darby motor units merger

MONDAY, JUNE 27: KUALA LUMPUR- Permodalan Nasional Bhd to hold press conference on income distribution on ASD & ASN at Theatrette, Level 2, Menara PNB, Kuala Lumpur at 1215 (0415 GMT); KUALA LUMPUR- Prime Minister Najib Tun Razak attends Dialogue with Career Comeback Women at Special Meeting Room 1, Level 3, Prime Minister's Office at 1530 (0730 GMT) KUALA LUMPUR- Minister of International Trade and Industry Mustapa Mohamed to grace Scope International's 15th anniversary celebration at Wisma Scope International, No. 2 Jln Teknologi Malaysia, Bukit Jalil, Kuala Lumpur at 0900 (0100 GMT)

UMW’s management has not indicated intention for merger. The company is in the midst of restructuring its core operation following the decision to exit the oil and gas business.

UMW Holdings assembles, markets and distribute Toyota vehicles, as well as markets and distribute Lexus vehicles in Malaysia. UMW is also the single largest shareholder in Perusahaan Otomobil Kedua (Perodua), with 38% stake in the company. Overall, UMW captured 47% market share of Malaysia total industry volume (TIV) in 2016.

Sime Darby Motors assembles, imports, distributes and sells luxury marques such as BMW,
Jaguar, Land Rover and Porsche. Mass market brands under Sime Darby Motors include Hyundai and Ford. The group has a presence in 10 countries in the Asia Pacific region. 

“We estimate Sime Darby Motors had 4% market share in 2016,” it said.

CIMB Research noted that the potential merger will create a major auto company with over 50% market share of Malaysia TIV. 

In addition, the merger could result in earnings contribution from outside Malaysia for UMW given that Sime Darby Motors holds the BMW distributorship rights for Asia Pacific. 

“We gathered that over 80% of Sime Darby Motors’ profit before tax and interest in 1H6/FY17 was from outside Malaysia.

“Nonetheless, we project minimal operating synergies between the two companies as there will not be any platform-sharing that could translate into cost savings.

“We make no EPS changes. Maintain Hold and RM5.50 target price, based on 12 times CY18 P/E (10-year historical mean). 

“We advise investors to switch to Bermaz for better exposure to the auto sector. A key upside risk is stronger auto demand recovery while downside risks include delays in the disposal of listed and non-listed oil and gas assets,” said CIMB Research.