Investment Highlights

• We retain our HOLD rating on MBM Resources (MBM) with an FV of RM2.20 based on an FY18F PE of 9.5x. We believe the group is taking measures to address the root problems in its alloy wheel business unit, which has been loss-making since 2013.

• Our key takeaways from an analyst briefing held by MBM on Thursday:
  1. MBM is supplying wheels for the standard variant of the new Perodua Myvi, which will be launched by year-end. The last significant update on the model was a facelift on the secondgeneration Myvi in early 2015. Our sales projections for Perodua are 205K/214K for FY17/FY18, against 7MFY17 sales of 119K units (+5% YoY).
     
     We believe this contract will be a new and crucial test for the business relationship between MBM and Perodua. The group currently supplies for certain variants of the Bezza and the existing Myvi, though it has eyed a share of the Axia for a while now. It will start production for the new Myvi in small quantities from this month and gradually ramp up volume. The challenge would be to take on the incremental volume while meeting certain delivery standards set by Perodua. MBM has given an assurance that it has to a large extent resolved major operational issues that previously led to a high rejection rate of 40%.
      
  2. The alloy wheel unit needs more than the new Perodua Myvi to breakeven. The addition will certainly boost utilisation from the present 50% (of the total capacity of 60K/month or 720K/year) but it will still fall short of the 75-100% (45-60K/month) level needed for the unit to be profitable. The unit produced 123K units in 1H17 (21K/month), a YoY growth of 89% and 18% drop from 2H16.
     
     We believe the group will rely on securing new customers or business segments to close that last gap. It aims to get there by end-2018.We caution that this would require having forged a stable stream of business from Perodua and securing a new customer that can commit large numbers to take up the remaining capacity.
      
  3. The word “expansion” is a red flag. The next phase of expansion for the alloy wheel unit would to increase capacity by 25% to 1mil units. MBM is understandably cautious about this next step given the years-long challenge it has had to get to breakeven. It said a minimum 6-month period of steady volume would be a sign to consider the next phase of expansion.
• We believe the immediate goal for MBM is to sustain the higher production volume that comes with the new Myvi. With this foundation in place, it would be able to attract new customers towards the end goal of making the alloy wheel unit profitable.

Source: AmInvest Research - 25 Aug 2017