Investment Highlights

• We retain our HOLD and FV of RM2.30/share on MBM Resources (MBM) based on an FY18F PE of 9.5x.

• Key points from the analyst briefing held by MBM on Friday:

1) The relationship with Perodua is improving. MBM shared that it will supply 100% of the wheels on the new Perodua SUV and the Axia (for which it will eventually supply a quarter of the wheels, from 10% now). We believe the Perodua SUV could debut by year-end or early 2019, and prioritize on a stronger margin rather than volume.

2) Volume for the alloy wheels unit climbed a third year to 301K in 2017 (resulting in a utilization rate of 40% from a total capacity of 750K/year) from 215K in 2016. MBM is still far from the 650-700K it needs in annual production to see an operating profit, which management targets for 2019.

3) It is sensibly cautious on the prospect of new business from Proton. We believe it will be difficult to find a win-win situation from the 30% cost reduction that Proton is demanding from its parts suppliers. While Proton dangles the potential volume from the Proton SUV, the success of the model will depend on current negotiations and whether it can price the car competitively. MBM's reliance on Proton is only on the supply of steel wheels, which it has progressively pared down given the switch by OEMs to alloy.

• We are positive on MBM's approach to build volume for its alloy wheels unit on a slow and steady basis. This would avoid its past mistake of ramping up volume without having addressed the operational issues that led to sub-optimal product quality.

• We emphasize that the group needs a solid foundation of volume supplied to Perodua and the subsequent addition from prospective customers, to finally take the unit out of the red.

Source: AmInvest Research - 26 Feb 2018