• We retain our HOLD rating on MBM Resources (MBM) with an unchanged FV of RM2.30 based on an FY18F PE of 9.5x — 3 notches below its three-year average historical forward PE of 12.9x.

• We believe that the group is taking measures to address the root problems in its alloy wheel business unit, which has been loss-making for years as production failed to reach the optimal level.

• Our key takeaways from a meeting with management last week: (1) Low production volume is still the main culprit. The alloy wheel unit is currently utilising only 50% of total capacity (of 60K/month or 720k/year). The bulk of this has been taken up by Perodua and the rest by 3 German REM clients. It needs to be near the full utilisation level to break even. MBM plans to bid for more jobs from Perodua, and is ironing out plans for a Chinese customer to take up any excess capacity. (2) MBM is repairing a broken foundation. The unit saw a massive rejection rate of 40% as a result of an inadequate infrastructure. Its facilities lacked several crucial components, a sizable mid-management team to coordinate the operations, and a coherent workflow. MBM had lost out on some contracts. Also, it needed to pare down its existing jobs due to the above-mentioned limitations. Management said that it will address the low hanging fruit to reduce wastage to 20%, and will need to resolve the fundamental issues to cut this to a meaningful level (~10%).

• We believe the catch-22 would be a jump in volume that could worsen the operational issues in its alloy wheel unit. We are positive that management is cognizant of this, and that it has placed a priority on getting things in order ahead of any major contracts.

• It will take a cautious approach towards the next expansion phase slated for this unit, which would raise its production capacity by 25% to 1mil units annually.

• At this stage, it is important for MBM to solve the fundamental issues in order to reach its long-term volume targets.

Source: AmInvest Research - 13 Jun 2017