Investment Highlights

• We maintain BUY on MBM Resources with an unchanged FV of RM2.87 based on an FY19 PE of 9.5x.

• Key points from the analyst briefing on Friday:

1) Breakeven at operating level eyed for OMI in 2019. It requires both higher volume and operating efficiency. MBM aims to raise OMI’s utilization rate to 56% by year-end from 50% at end-2017 with higher orders from Perodua. It will double deliveries to the Axia and start on the SUV by end-Sept, to add to its existing supply for certain variants of the Myvi and Bezza. Efficiency improved as OMI cut its rejection rate (to 15% from 40% in early last year), trimmed its staff by a third and reduced the number of orders on hold. The outcome was reflected in MBM’s 1Q18 results: the negative operating margin for its auto parts segment shrunk to 4% from 6-15% in the two years prior.

2) Setting up the stage for OMI’s next major expansion. MBM is tentatively looking to expand OMI’s capacity by a third to 1mil wheels/year from 2019. This would be to cater for Citic Dicastal, the top supplier of alloy wheels in China, and globally. Citic Dicastal would absorb up to half of OMI’s total capacity to produce for its exports markets in India and Europe. They are in the process of qualifying the OMI plant for this and we believe clarity on the tie-up and potential expansion would emerge by year-end. While the cost to expand would not be substantial (up to RM13mil for additional machines), we believe MBM has taken the pragmatic move to secure orders before it ramps up capacity. Citic Dicastal has been a technical partner of MBM since 2017 to improve OMI’s operational efficiency and product quality. We emphasize the tie-up in a win-win situation would be the culmination of this working relationship that began last year.

3) MBM refrained from commenting on the UMW offer, which is still being negotiated at the parent level.

• We believe that there would be pressure on UMW to raise its offer price from RM2.56/MBM share eventually even though the group reiterated last week that it would not do so. It has until end-October to resolve the issue.

Source: AmInvest Research - 28 May 2018