KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB) research advised UMW Holdings Bhd's shareholders to accept Sime Darby Bhd's mandatory general offer (MGO) for the company's shares at RM5.00 a piece citing higher valuations.
The firm's sum of parts (SOP) valuation prices the company's shares at RM3.85 a piece.
"We are overall positive on the offer price and advise shareholders to accept the offer, which is higher than our existing SOP of RM3.85," HLIB research said.
The investment bank has a "Hold" call on the company with a target price of RM5, based on Sime Darby's offer price.
On Nov 16, 2023, Sime Darby received shareholders' approval to proceed with a MGO for UMW Holdings which prices the company at RM5.84 billion.
HLIB research said UMW's earnings for the third quarter ended Sept 30, 2023 (3Q23) exceeded its FY23 forecast by 81.2 per cent and consensus by 89.3 per cent.
The company's core profit after tax and minority interests (PATMI) improved 40.2 per cent year-on-year (YoY) to RM159.4 million in 3Q23 and 22.7 per cent year-to-date (YTD) to RM405.9 million in nine months ended Sept 30, 2023 (9MFY23).
This was mainly driven by stronger contribution across all segments as the economy continued its recovery trend since full reopening in 2022.
UMW's automotive segment recorded higher YTD sales volume of Toyota, Lexus and Perodua.
Similarly, both the equipment and manufacturing segments (especially aerospace turned profitable) also saw an improvement in sales revenue with higher demand from both local and foreign markets.
"We expect sustained 4Q23 earnings ahead, leveraging onto the high order backlogs from the automotive segment and continued economic recovery," it said in a note.
The investment bank has also raised UMW's earnings for FY23 to FY25 forecast by 15 per cent to 17.6 per cent, accounting for stronger automotive sales and earnings.
Additionally, HLIB research said UMW's automotive segment is expected to continue to perform into FY24, leveraging onto the strong order backlogs of over 40,000 units for Toyota and 140,000 units for Perodua.
It said new order intake remains healthy, resulting to stable order backlogs.
"Management has guided for an improvement in the supply chain situation in the second half of financial year 2023 (2HFY23). "The negative impact of depreciating ringgit versus US dollar and higher raw material costs, should be partly cushioned by the strong sales volume and continuous costs efficiency management," it noted.
Meanwhile, HLIB research said UMW's equipment segment is also expected to improve in tandem with the economic recovery post pandemic in the region (except Myanmar).
Heavy equipment will leverage onto the resumption of infrastructure and construction projects in Malaysia, Singapore and Papua New Guinea.
The company will capitalise on high local automotive demand through its manufacturing and engineering (M&E) units, producing automotive parts (Kayaba) and lubricants.
Aerospace manufacturing continues to gain traction with increasing production rate – as global airlines reinstate capacity.