UMW Holdings Berhad

The group announced on 22 Apr 2008:
proposals to acquire two automotive component makers in India for a total of USD23.5m (RM74.7m), and

a share sale agreement for the acquisition of a 60% stake in an Indian company involved in charter hire onshore drilling activities.

The proposed acquisition of the two automotive component makers in India is expected to strengthen the group’s manufacturing and engineering division via exposure to India’s fast growing automotive sector. Meanwhile, the proposed acquisition of a 60% stake in the Indian charter hire onshore drilling company is expected to boost the group’s oil and gas division’s exploration and development support operations in India and the Middle East.

The core domestic automotive division continued to register strong vehicle sales in Mar, with Toyota and Perodua maintaining their respective lead positions in the non-national and overall industry respectively.

News flow for the group is expected to remain positive, with strong results expected for 1Q08 and the upcoming listing of the group’s fast-growing oil and gas unit later this year.

We maintain our BUY recommendation with an unchanged price target of RM8.20/share, which is based on our RNAV estimate.

Acquisition of two automotive component makers in India

UMW announced on 22 Apr 2008 that it had entered into two separate share sale agreements with Dato’ Muthukumar a/l Ayarpadde for the acquisition of a 51% stake in MK Autocomponents Ltd (MKAL) and a 50% stake in MK Automotive Industries Ltd (MKD) for USD22.5m (RM71.6m) and USD971m (RM3.1m) respectively.

MKAL owns the entire share capital of Sathya Auto Private Ltd (SAPL) and Castwel Autoparts Private Ltd (CAPL), both of which operate in India. SAPL manufactures mechanical jacks, radiator caps, sheet metal components for automotive manufacturers in India whilst CAPL manufactures aluminium gravity die castings, aluminium alloys, water pump body, cover and brackets for automotive manufacturers in India.

MKD owns a 50% stake in Dongshin Motech Private Ltd of India, an original equipment manufacturer (OEM) for stamped automotive body parts for Korean car manufacturers.

Although the proposed acquisitions are not expected to have any material impact on group earnings, MKAL and MKD are expected to strengthen the group’s manufacturing and engineering division via exposure to India’s fast growing automotive sector.

Strengthening oil and gas exploration and development support in India and Middle East

Also on 22 Apr 2008, the group announced that its 65%-subsidiary, UMW India Ventures (L) Ltd (UMWIV) had entered into a share sale agreement with Jogen N. Buragohain (Jogen) for the acquisition of a 60% stake in Jaybee Drilling (P) Ltd (JDPL) for USD1.9m (RM6.0m). Jogen will at the same time subscribe in stages, for up to a 40% stake in the enlarged share capital of UMW Sher, a company wholly-owned by UMWIV, for a total of USD2m.

Upon completion of the proposed JDPL acquisition and proposed share subscription, JDPL will become the operating company for the charter hire onshore drilling activities in India whilst UMW Sher will be the asset owner holding all new assets required for the operations of onshore drilling activities in India.

Both transactions are not expected to impact on group earnings materially but are expected to strengthen UMW Oil and Gas’ exploration and development support operations in India and the Middle East.

Domestic vehicle sales remain strong, Perodua boosting training centres

At the group’s core automotive division, numbers remained strong as at the end of Mar 2008, with Toyota and Perodua maintaining their lead positions in the non-national segment and overall industry respectively.

As at the end of Mar 2008, Toyota’s share of total industry volume (TIV) was at 18.5%, up 0.9%-points from Feb 2008, reflecting the popularity of the new Altis model that was launched in Mar, and also continued strong sales for the high-volume Vios model. Toyota remained the top-selling non-national brand in the industry.

Perodua’s share of TIV was 30.8% as at the end of Mar 2008, down 1%-point from 31.8% in the previous month. The loss in market share was due to competition from the successful new Proton Saga, which was launched in Jan 2008. The new 1.3 litre Proton Saga is priced from about RM31,000 to RM40,000, competing with Perodua’s 1.0 litre Viva model, which is priced from RM37,000.

Although some loss in market share at Perodua is unavoidable, we believe the market is big enough for both Proton and Perodua, with Proton targeting mainly the sedan market and Perodua focusing on the compact car segment where consumers are looking for a second car.

Despite the slight drop in market share, Perodua remained the best-selling model in the overall market with the highest share of TIV as at the end of Mar 2008. In an effort to improve efficiency and service level to its custom

RM61m in the opening of four 3S-regional training centres (RTC) in Johor Baru, Kuching, Prai and Kota Baru, and one learning centre in Rawang. The centres will feature the 3S concept where sales, service and spare parts businesses will be placed under one roof. The centres will also conduct in-house training for staff and dealers.

Earnings Outlook:

• UMW remains a leader in its core automotive business, both in the national and non-national segment, under Toyota and Perodua, respectively. The Toyota franchise has commanded top position in the non-national segment for the last 17 years whilst Perodua has been the top selling model in the industry since 2006.

• UMW’s relatively new core business in oil and gas has also performed well, having gone from a new core business in 2002 to becoming the second contributor to group earnings currently.

• Prospective revenues and earnings are expected to remain strong, underpinned by UMW’s relatively strong foothold in the recovering automotive sector and robust growth at the newer oil and gas division, on the back of high oil prices and overseas expansion, in particular China and India.

• 2008 and 2009 revenues and earnings are expected to continue to remain strong, underpinned by:

• Continued growth in Toyota and Perodua sales on the back of new model launches (Toyota Altis in Mar 2008 and replacement model for Perodua Kembara by mid-08) and sustained demand for existing high-volume models such as the Toyota Vios, Perodua Viva and Perodua MyVi; and

• Strong growth at the oil and gas division, which will continue to enjoy a strong order book at existing oil and gas operations plus initial contributions from new businesses including Zhongyou BSS (Qinhuangdao) Petropipe Co Ltd in China by 4Q08 and UMW Naga Two (L) Ltd from Sep 2008.

Recommendation

• News flow for the group is expected to remain positive, with strong results expected for 1Q08 and the upcoming listing of the group’s fast-growing oil and gas unit later this year.

• The potential listing of the oil and gas unit will result in UMW shareholders receiving one free UMW Oil and Gas share for every eight UMW share held.

• The recently-proposed acquisitions in India do not require shareholders’ approval and should be internally funded – as at 31 Dec 2007, UMW had an estimated net cash position of RM820m.

• We maintain our BUY recommendation with an RNAV-based price target of RM8.20/share.