• MBM Resources (MBM) said on Monday it will consolidate ownership of Oriental Metal Industries (OMI) by buying the 21% it did not own from two companies for a total of RM1.75mil. OMI makes steel and alloy wheels.

• The salient details from the announcement are: 1) The 21% OMI stake will be bought at the unit's book value of 76 sen/share at the end of 2016. The amount will be paid by MBM with internal funds. 2) The 21% stake is held by Central Motor Wheel Co Ltd (19%) and Toyota Tsusho Corp of Japan (3%), which are a subsidiary and associate of Toyota Motor Corp respectively. MBM inked a JV with the two in 2005 to obtain technical assistance in order to raise the quality of OMI products. 3) MBM said this move would allow it to seek other collaborators for OMI.

• We are positive on this news as this could be a precursor for real change in OMI's direction. Recall that the unit has been loss-making for years due to the poor utilisation rate seen for its alloy wheels’ production.

• However, we emphasize that the ideal partner for OMI should see the unit addressing its long-running operational issues (that have led to high rejection rates and sub-optimal product quality) and raise its production closer to the breakeven level.

• MBM aims to complete the transaction in two months and requires the approval of the international trade and industry ministry. We believe the price of RM1.75mil is manageable given MBM's low gearing level of 0.1x and cash reserves of RM186mil.

• We deem the earnings impact from the full consolidation of OMI to be minor, and retain our HOLD call and FV of RM2.20/share for MBM. While the addition of the new Myvi would have improved the alloy wheels’ utilisation rate to exceed 50%, we note that it is imperative for MBM to both retain existing customers and secure new ones to finally turn a profit there.

Source: AmInvest Research - 13 Feb 2018