Investment Highlights

• We maintain our BUY call on MBM Resources (MBMR) with a higher FV of RM4.05/share from RM3.41/share based on an FY20F PE of 9.0x.

• We raise our FY19/20/21 core net profit forecast by 15%/19%/7%. This is to account for the cessation of the alloy wheel plant which has been a dampener on its earnings and lower finance cost with cash proceeds of RM74.4mil from the disposal of its 22% stake in both HMSM and HMMM used to pare down its borrowings.

• Key points from our meeting with management on Monday:

1) Operations of OMI Alloy ceased. MBMR has fully ceased the operation of its alloy wheel plant effective June 2019. We are positive on this update, and we expect MBMR to attain better valuations on the back of earnings improvement in the future as OMI Alloy has been a drag on the group’s earnings. We had earlier projected OMI Alloy to post a net loss of RM30.0mil for FY19 and FY20 due to the plant’s low utilization. Hence, the cessation of plant is expected to lift the group’s earnings ahead. The group assured that the supply of alloy wheels to Perodua will not be disrupted as there are arrangements for two other companies to fill the void left by OMI Alloy, namely Pako Automotive and Citic Dicastal. We believe that it is in the group’s interest to avoid a supply disruption for Perodua, which is a 22.6%- associate of MBMR.

2) New SUV launch from Perodua in 2H2020. The group guided that Perodua will be launching a new SUV in 2H2020. It is said to be a smaller version of the Perodua Aruz. We believe that this will be a 5-seater SUV since Perodua already has two 7-seaters in its product mix, which is the Alza and Aruz. We are excited about the launch of this model as it is expected to be affordably priced and would serve as a direct competitor to the upcoming Proton X50.

3) Cash proceeds from recent disposal of stakes in HMSM and HMMM to be used to pare down borrowings. Recall that MBMR recently announced a disposal of its 22% stake in both HMSM and HMMM for a cash consideration of RM74.4mil. The group guided that the cash will be fully used to pare down the group’s borrowings. With that, we tweaked our estimates to factor in the lower interest expense for FY19 onwards. We are positive on this update as the lower finance cost will boost the group’s earnings.

• We believe that MBMR will continue to shine as a proxy to Perodua’s dominance in the local automotive space. We are excited about the group’s future expansion plans either organically or via more joint ventures with established names to further build on its distribution and auto parts business.

Source: AmInvest Research - 20 Jun 2019