Investment Highlights

• We maintain BUY on MBM Resources with an FV of RM3.48 pegged to an FY19F PE of 9.0x. Key points from the analyst briefing on Friday:

1) No commitment to an outright sale of OMI Alloy. Management said it was reviewing options to “stop the bleeding” and had given itself up to this year to resolve the issue of the unit’s continuing losses. It was not able to specify a more concrete plan or deadline for this.

2) Management suggested the potential value of OMI alloy was higher than figures suggested in a recent media report. Recall that the plant could be valued anywhere from RM41.1mil based on the value of initial investments and subsequent impairments specified in a media interview executive chairman Datuk Abdul Rahim Abdul Halim had with The Edge Malaysia in January. We reiterate that it is unlikely that the group will be able to realize the entire book value of the plant from the sale, 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.

3) Perodua’s supply from OMI is secured for at least one year. Management assured that the supply of wheels from OMI Alloy to Perodua will not see a disruption in 2019 regardless of any change in direction by the former. We believe it is fully in the group’s interest to avoid a major supply issue for Perodua, which is its 20% associate and an integral part of the local auto sector.

• We believe the cessation of OMI would ultimately be positive for MBM. The unit has been loss-making due to low utilization of its plant. It has built a strong foundation on the volume from Perodua but the entry of Citic Dicastal was crucial in achieving profit.

• The auto parts manufacturing segment saw its loss before tax decline to RM12mil in FY18 from RM79mil in FY17. Utilization improved to 46% with 344K in sales from 40% and 301K in sales in FY17.

• The removal of OMI would enable 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 stake in Perodua.

• 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 RM10–20mil in projected losses (translating to 2.6 sen/share – 5.1 sen/share) for the coming years.

Source: AmInvest Research - 4 Mar 2019