Wednesday 21 December 2011

Could UMW be a good match for Proton?

Although UMW Holdings Bhd has denied a media report that it had submitted a bid for Khazanah Nasional Bhd’s 42.7% stake in Proton Holdings Bhd, it is still regarded as a good fit for the national automaker.

“What Proton needs right now is a new stakeholder with the right R&D capabilities,” said one market observer.

In response to several media reports, UMW last week announced twice to Bursa Malaysia that it is not bidding for the national carmaker.

“UMW wishes to advise that our major shareholders have confirmed that they have not submitted any bid to Khazanah nor have they won any bid to buy Khazanah’s stake in Proton,” it told Bursa Malaysia.

Parties said to be in the running for the sovereaign wealth fund’s stake are DRB-Hicom Bhd and the Naza Group of Companies, though neither has confirmed this.

But as they say, there is no smoke without fire — even if it appears that DRB-Hicom is viewed as the favoured candidate.

UMW, which lists Toyota and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) under its automotive segment, managed 46.4% of the country’s total industry volume (TIV) in 2010.

Perodua itself last commanded a 28.9% market share for the first 10 months of 2011, marginally ahead of Proton’s 27.1%, though the former has been the country’s top automaker for the past five years.

UMW is the largest stakeholder in Perodua with a 38% stake, with the other majority shareholders being MBM Resources Bhd (20%), Daihatsu Motor Co Ltd (20%) and PNB Equity Resources Corp (10%).

“Through Perodua, UMW has the requisite R&D resources, with technology transfer from Daihatsu. The two companies — Perodua and Proton — still have room to synergise as they cater for different market segments,” said an analyst.

The estimated cost to develop a new car is RM1 billion and Proton may not be able to sustain such an investment over time as the costly £490 million (RM2.4 billion) turnaround plan for Group Lotus plc continues to absorb resources.

Calls for a merger between Perodua and Proton are not new and have made the rounds since the middle of last year.

Back then, it was rumoured that Proton — which was seen to be in the driver’s seat — was keen on a merger but Perodua was not.

Early this month, before rumours of the Proton stake sale emerged, Daihatsu Motor Japan president Koichi Ina told The Edge weekly in Tokyo that the Japanese carmaker was firm against a merger between Perodua and Proton.

He reiterated the company’s view that a Proton-Perodua merger would not be appropriate because “very different cultures and product lines” between the two.

Nonetheless, Perodua’s stellar track record — especially when viewed against Proton — cannot be easily dismissed. Moreover, Perodua has also been slowly encroaching into Proton’s turf.

Initially operating only in the small car category, Perodua has been making inroads into the 1.3-litre segment with the Myvi and the 1.5-litre Alza multi-purpose vehicle and the latest 1.5-litre Myvi. The product expansion strategy has taken away some market share from Proton.

Meanwhile, last week UMW announced that its 22.4% associate WSP Holdings, a manufacturer of oil country tubular goods (OCTG) listed on the New York Stock Exchange, had received a takeover offer for US$0.60 (RM1.90) per share.

This may be a signal for UMW, which first began in the automotive industry before diversifying into other areas, to tighten its focus on car manufacturing.

For the first nine months of the year, only its automotive and equipment segments reported a net profit while its oil and gas and manufacturing and engineering segments incurred a net loss.

For 3QFY11 ended Sept 30, UMW’s revenue for its automotive segment grew 17.2% from the preceding quarter due to sales growth from Toyota and Perodua, as well as a 90% jump in Myvi sales.

UMW said revenue for its 9MFY11 rose to RM10.08 billion from RM9.4 billion a year ago, while net profit fell to RM452.2 million from RM493.9 million.

It had RM10.57 billion in assets as at Sept 30 with a market capitalisation of RM7.56 billion at its last traded stock price of RM6.47.


This article appeared in The Edge Financial Daily, December 21, 2011.



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