Highlights
- Sime Darby has on December 2023 completed the acquisition of 61.2% stake in UMW Holdings from Permodalan Nasional Berhad (PNB) for RM3.57 billion. A complete takeover should just be a matter of time as the group has successfully accumulated 94.15% of UMW’s shares as of 12 Jan 2024.
- Sime Darby has stated that the group will be absorbing UMW’s debts, including the perpetual sukuks. The sukuks also don’t contain ‘change of control put’ feature, hence sukukholders can’t mandate the perp redemption in this case.
- The acquisition move appears to be advantageous for UMW sukukholders given Sime Darby's comparatively healthier profit and loss statement. Sime Darby boasts a larger revenue base and a slightly higher operating margin than UMW.
- UMW is embroiled in the recent Daihatsu safety scandal as Daihatsu provides the designs and main components for Perodua’s cars. Suppose in the worst-case scenario where the cars need to be recalled, we anticipate that Perodua will negotiate a cost-sharing arrangement with Daihatsu, given that the entire ordeal has been attributed to Daihatsu's actions.
- Sime Darby's debt to equity ratio is projected to increase from 0.57 in 1Q24 to 0.88 post-acquisition. We feel that the ratio is still acceptable as a higher leverage ratio is customary following a significant acquisition.
- We recommend existing sukukholders to hold on to their UMW holdings. We note that the small lot (BE) of the perpetual sukuk has a higher yield (5.0%) than the full lot (4.2%). Still, we would only suggest investor who understand the risk of a perpetual sukuk to consider the UMWHMK 6.350% Perpetual Corp (MYR).
Sime Darby’s acquisition of UMW
In its endeavour to be Malaysia’s leading automotive player, Sime Darby has on December 2023 completed the acquisition of 61.2% stake in UMW Holdings from Permodalan Nasional Berhad (PNB) for RM3.57 billion. This is followed by the mandatory takeover offer to buy the remaining stake from the market, where the group has successfully accumulated 94.15% of UMW’s shares as of 12 Jan 2024. This in essence lays the path for the inevitable delisting of UMW Holdings shares upon the whole acquisition.
A complete takeover should just be a matter of time as Sime Darby will mobilise the Capital Markets and Services Act 2007 (CMSA) to compulsorily acquire any remaining shares from shareholders who have not accepted the offer, or failed to transfer their shares to the group.
What about UMW sukukholders?
As for UMW sukuks, Sime Darby’s group chief financial officer Mustamir Mohamad has explicitly stated in a media press that the group will be absorbing UMW’s debts, including the perpetual sukuks. On top of that, the sukuks doesn’t contain ‘change of control put’ feature, hence sukukholders doesn’t have the discretion to mandate the perp redemption in this case.
Therefore, moving forward any UMW sukuks would have to be evaluated based on the credit strength of Sime Darby rather than the original issuer.
A strategic move to capture more automotive market share in Malaysia
With the acquisition, Sime Darby will incorporate car brands like Perodua, Toyota and Lexus to its automotive lineup which already consists of luxury names like BMW, MINI and Porsche.
In 1H23, two of the brands under UMW’s umbrella, Perodua and Toyota jointly accounted for 52.1% of the auto market share in Malaysia. Through the acquisition, Sime Darby is effectively buying over more than half of Malaysia’s auto market share, which will help to fortify their automotive moat in Malaysia. This would also further enhance its already diversified automotive distribution rights.
Chart 1: Malaysia’s automotive market share based on brands
Table 1: The consolidated entity’s automotive exposure in Malaysia
| Malaysia | |
| UMW | Sime Darby |
| Toyota (distributor) | BMW, MINI (assembly*, distributor) |
| Lexus (distirbutor) | Ford (assembly*, distributor) |
| Perodua (owns 38% stakes) | Jaguar, Land Rover (distributor) |
| Hyundai (assembly, distributor) | |
| Porsche (distributor) | |
| Volvo (distributor) | |
| BYD (distributor) | |
| Mazda (assembly*) | |
| *: certain car models Source: UMW, Sime Darby, iFAST compilations. Data as of 30 January 2024. |
|
Automotive segment to maintain as the primary revenue driver for the consolidated entity
Automotive segment has been the primary revenue generator for both Sime Darby and UMW. In 3 months ended 30 September 2023, the segment has contributed to around 65% of Sime Darby’s total revenue and about 83% of UMW’s total revenue. Moving forward, we expect automotive segment to continue to be in the driving seat for the consolidated company.
Chart 2: The entities’ revenue proportion by division
Advantageous for UMW sukukholders given Sime Darby's
comparatively healthier P&L
The acquisition move appears to be advantageous for UMW sukukholders given Sime Darby's comparatively healthier profit and loss statement. Sime Darby boasts a larger revenue base and a slightly higher operating margin than UMW, providing a more robust financial for UMW's existing sukukholders to rely on.
Chart 3: Breakdown of revenue and operating profit margin
Daihatsu safety scandal
UMW is embroiled in the recent Daihatsu safety scandal, which came to light in April 2023 with the manipulation of door trim in side-collision crash testing. During this revelation, Daihatsu acknowledged their wrongdoings and estimated an approximately 88,000 vehicles intended for the overseas market are affected. Subsequently, in May, irregularities in pole side collision tests were exposed.
Then, in December 2023, Daihatsu has circulated findings from their own internal probe where they found 174 new cases of irregularities across 25 test items.
As Daihatsu provides the designs and main components for Perodua’s cars, from engines to transmissions, UMW is naturally affected by this scandal. The affected models include the first and second-generation Axia, second-generation Alza, Aruz, Ativa, Bezza and Myvi.
In its response, Perodua commented that they are doing a detailed assessment and are currently in discussion with Malaysian authorities regarding the issue. Suppose in the worst-case scenario where the cars need to be recalled at no cost, we anticipate that Perodua will negotiate a cost-sharing arrangement with Daihatsu, given that the entire ordeal has been attributed to Daihatsu's actions. On top of that, given Perodua’s status as Malaysia’s leading national car maker, we opine that the government will lend a hand through financial loan if the outcome is worse than expected.
A spike in debt to equity ratio due to acquisition activities, but risk is mitigated by solid backing
Sime Darby will be funding the acquisition through borrowings of about 90% while the remaining 10% would be through internal cash. As such, Sime Darby's debt to equity ratio is projected to increase from 0.57 in 1Q24 to 0.88 post-acquisition. The net debt to equity ratio is also anticipated to rise to 0.74. Despite this, we feel that the ratio is acceptable as a higher leverage ratio is customary following a significant acquisition.
In addition, considering the group’s ownership structure where 40% of the outstanding shares is owned by Amanah Saham Nasional Berhad, the largest unit trust management company in Malaysia and 15% is owned by Employee’s Provident Fund (EPF), the government-managed retirement saving scheme in Malaysia, Sime Darby enjoys a solid backing while working to gradually pare down its borrowings in the coming years.
On the flip side, while Sime Darby’s interest coverage ratio has fell to 6.4 times in 1Q24 due to another earlier acquisition of Onsite Rental Group for RM1.92 billion that raised the group’s overall borrowing, yet the ratio is still deemed to be in a healthy range.
In a rather comfortable position to redeem/refinance outstanding sukuks
In terms of bond distribution, the consolidated entity would see sukuks maturing in 2025, 2026, 2027 and 2028, primarily UMW sukuks. As of now, we don’t see it posing a significant challenge to the entity given that Sime Darby’s balance sheet is well-equipped to support the redemption. To illustrate, Sime Darby’s bank balances, deposits and cash stood at RM2.3 billion in 1Q24 against the maturing sukuk size of RM400 million in 2025. Moreover, with the renowned shareholders that the entity is backed with, they can also tap into refinancing channel when the sukuk is due as lenders would feel much comfortable with the backing the entity has.
The perpetual sukuk that is having its first call date in 2028 is the UMWHMK 6.350% Perpetual Corp (MYR). With the aforementioned points, we see the chances of calling being high at the current standpoint.
Chart 4: Consolidated entity’s bond redemption schedule
What if UMWHMK 6.350% Perpetual Corp (MYR) is not called?
If UMWHMK 6.350% Perpetual Corp (MYR) isn’t called back in April 2028, it would be reset at 10Y Malaysia Government Securities (MGS) rate + 2.362% + 1%. The reset will occur every 10 years, with no further step-up during the intervening years.
Excluding the periods of the 2008 financial crisis and 2019 coronavirus time when the 10Y yield experienced notable decline, the 10Y yield has hovered well in the high 3% to low 4% level, with the average yield for the past 18 years at 3.8%. Using this as a proxy, the reset rate would be around 7.16%. From this perspective, it doesn’t really provide a substantial prompt for the issuer to call it back, particularly if the 10Y yield fell in 2028.
However, considering that a non-call event would be harmful to an entity’s image, we stay to our view that the chances of calling being high, especially considering the sizable balance sheet Sime Darby has. Nevertheless, investors must carefully gauge if they can stomach the risk.
Chart
5: Average MGS 10Y yield for the past 15 years 
Risks
The group’s revenue would be impacted if a major automotive brand like BMW ceases the distributor partnership with Sime Darby. However, considering the long partnership the parties have had, the risk is moderately contained.
Other than that, when it comes to perpetual sukuk, there’s an additional layer of uncertainty as the issuer has the discretion to defer coupon payment and not call back the debt instrument without constituting as a default.
Credit rating
From a credit rating perspective, Sime Darby is unrated following the group’s request to withdraw the ratings by Moody’s and Fitch in December 2017. To the best of our knowledge, there has been no subsequent rating on Sime Darby henceforth. For UMW, the conventional sukuks are last rated at AA+ and the perpetual sukuks are rated at AA-. Following the acquisition news, MARC has placed UMW ratings on MARCWatch Developing, which means the rating agency will revisit and complete the rating assessment when the acquisition is done and dusted.
Recommendation
With UMW sukuks being backed by a more robust Sime Darby’s financial, we recommend existing sukukholders to hold on to their holdings. As for investors who are interested in UMW sukuks, we feel that the yield on the conventional sukuks aren’t compelling. On the flip side, we note that the small lot (BE) of the perpetual sukuk has a higher yield (4.9%) than the full lot (4.1%). Still, we would only suggest investor who understand the risk on a perpetual sukuk to consider the UMWHMK 6.350% Perpetual Corp (MYR) at 5.0%.
Table 2: UMW sukuk list
| Bond | Last rating (MARC) | Year to next call/ Year to maturity | Yield to next call/ Yield to maturity |
| UMWHMK 3.030% 05Nov2025 Corp (MYR) |
AA+ | 2Y8M | -/ 3.5% |
| UMWHMK 5.220% 02Oct2026 Corp (MYR) | AA+ | 3Y8M | -/ 3.6% |
| UMWHMK 3.880% 24Nov2026 Corp (MYR) |
AA+ | 3Y9M | -/3.6% |
| UMWHMK 6.350% Perpetual Corp (MYR) |
AA- | 4Y3M | 4.9%/ - |
| Source: Bondsupermart, Bloomberg Finance L.P. iFAST compilations. Data as of 2 February 2024. | |||
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in UMWHMK 6.350% Perpetual Corp (MYR) and the analyst who produced this report holds a NIL position in the abovementioned securities. Image is by the courtesy of Freepik (usertrmk).
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