UMW Holdings - WSP being taken private

News  WSP Holdings Ltd, a 22.3%-owned associate of UMW Holdings has agreed to a proposed merger by its parent, WSP OCTG Group Ltd, a company owned by HDS Investments LLC, and JM OCTG Group Ltd, for a total sum of c.USD893.6m, which includes the assumption of debt. The merger is expected to be completed in 2Q2013. WSP is a China-based manufacturer of seamless oil country tubular goods.

 Pursuant to the deal, each WSP ordinary shares issued and outstanding prior to the merger will be cancelled and cease to exist in exchange for the right to receive USD0.32 and one American Depositary Share (“ADS”). The ADS represents ten shares and shareholders have the right to surrender the ADS in exchange for USD3.20 in cash.

 The aforesaid criteria will not be applicable for shares held by Expert Master Holdings Limited (EMH), a firm owned by the company's CEO Longhua Piao, and UMW China Ventures (L) Ltd, which will be contributed to the parent immediately prior to the merger in exchange for equity interests of the parent.

Comments  Essentially the deal means that WSP is being taken private by its parent company, WSP OCTG Group Ltd, and UMW will retain its stake in the merged entity.

 We are unable to ascertain the future plans of WSP after its privatisation due to the limited information in UMW’s announcement to Bursa Malaysia. However, we believe the newly merged entity would have already drafted up a new plan to improve WSP’s profitability.

 We hope to gather more information from the company’s analyst briefing on 27 Feb 2013, scheduled after the planned release of its 4QFY12 results on 26 Feb 2013.

Outlook  We expect UMW Toyota and Perodua to retain their leadership in the non-national and national passenger car segments respectively.

 Re-rating catalysts would include: (i) a stronger than expected vehicle sales, and (ii) an improvement in its oil & gas division.

Forecast  We are keeping our estimates unchanged for now pending more information from management on the above development and ahead of the company’s upcoming 4QFY12 results release.

Rating   Maintain MARKET PERFORM

 The current share price offers a total return of 5% to our target price (TP).

Valuation  Maintaining our TP of RM12.37 based on 14x PER on FY13 EPS.

Risks  Losses from WSP may continue to drag down the group’s earnings.

Source: Kenanga