Investment Highlights

• We maintain BUY on MBM Resources with an unchanged FV of RM3.42/share pegged to a FY19F PE of 9.0x.

• The Edge Malaysia had an interview with Datuk Abdul Rahim Abdul Halim, MBM’s executive chairman. Key points were: 1) The planned tie-up with China’s Citic Dicastal had failed and no reason was provided for this; 2) OMI Alloy had closed its plant as the break-even point was too far away. Contracts from Perodua failed to mitigate the problem of low selling prices and insufficient volume; 3) MBM is looking into disposing of the alloy wheel plant but did not specify deadline for this or if there were any interested parties.

• We maintain our projections and FV for now as there is a lack of clarity on the situation with OMI Alloy and the full picture of how MBM intends to proceed as a group moving forward. However, a simplistic removal of OMI Alloy could alleviate RM20mil (5.1 sen/share) of projected losses, and boost our FY19 net profit to RM168mil.

• We think a one-off gain from the sale of OMI Alloy would be negligible. The plant could be valued at RM41.1mil (base case scenario) based on the value of the initial investments and subsequent impairments specified by Abdul Rahim.

• It is unlikely that the group will be able to realize from the sale the entire book value of the plant, considering that it has been consistently in the red: OMI Alloy made a revenue of RM34mil and a net loss of RM91mil in 2017. As of that year, OMI Alloy’s liabilities exceeded its assets by RM179mil.

• We believe the cessation of OMI Alloy would ultimately be positive for MBM. The unit has been loss-making for years due to low utilization of its plant (end-2018 target was 56% on an annual production capacity of 750K wheels). It has built a strong foundation on the volume from Perodua but the entry of Citic Dicastal was crucial in achieving profit.

• The removal of OMI enables MBM to refocus on two main components: its motor trading business under Federal Auto and its Perodua-related earnings from 51.5%-owned DMSB and the 22.5% stake in Perodua.

• Motor trading forms nearly 90% of the group’s topline, but 14% of PBT. MBM’s PBT still relies heavily on the associate stake in Perodua, which holds the pole position for volume in the local market but has made the progressive move to launch a margin-oriented SUV this month.

Source: AmInvest Research - 22 Jan 2019